Tapping UTMA Accounts: How to Legally Access Custodial Money

Shimshy Flagler needed to move some cash around. To save on taxes he’d put $50,000 of mutual funds into accounts on his kids’ names, using UTMA custodial accounts. This had saved him a lot of money over the years, but now he felt stuck. Legally, the money in the UTMAs belonged to his kids, but his business was tight now. Since he never really meant to give the money to his kids, he felt that taking some of it back was justified. Also, his oldest would be applying for student aid soon, and UTMA money could be heavily penalized.
Can parents access custodial funds from UTMA accounts? Is this path legally justified?

Why Go Crooked?

While raiding UTMA accounts isn’t a significant legal risk in most cases, it’s technically stealing and a breach of custodian responsibility. Regardless of the origins of the money, parents with control over custodial accounts are obligated to use them in the best interest of the minor named as the owner. (The halachic perspective is more nuanced and lenient in this specific case I’m told. Ask your LOR, when relevant.) Although there is limited scrutiny over these responsibilities, custodians can theoretically be sued or even prosecuted for the misuse of UTMA funds. And while this occurs very rarely, there’s no reason to break the rules when there are usually simple ways to legally justify tapping UTMA accounts.

Reimburse Yourself for Extras

Consider Shimshy’s desire to remove UTMA funds for his business. Although the kids will benefit from the business indirectly, it’s not something that a minor should pay out of their own funds. The same is generally assumed for basic housing, clothing, and food, which every parent is obligated to provide for their underage children. But what about the many additional things Shimshy pays for on his kids’ behalf, such as tuition, sleepaway camp, seminary, braces, Shabbos clothes, trips, etc.? Although these things are not extras in our world, legally they are. They are also clearly expenditures that a custodian can judge to be in the best interest of the child.

Parents are fully entitled to pay themselves back from UTMA accounts for the many thousands of dollars spent on “extras” that are clearly to the benefit of the child. The fact that parents can afford to pay for these items on their own dime, and in the past have chosen to do so, doesn’t mean they are obligated to. When we calculate the vast sums spent annually on our children above and beyond the bare basics, there’s clearly much scope for a parent to legally access UTMA funds. Especially if the parent did the UTMA gifting primarily as a tax maneuver, there’s no reason for them not to “maneuver” the money back too.

Taking It a Bit Further

The permissibility of taking reimbursement from UTMAs for legitimate child expenditures is clear-cut. It seems to me that combining multiple years’ worth of expenditures into one repayment would be totally fine too. Say someone knows he will spend $7,000 annually for the next decade to educate his child who is now five years old. Can he plan to reimburse himself retroactively right before the student aid cutoff for the $70,000 in accrued “loans” made to their child’s UTMA? It’s a bit unconventional, but lawyers I spoke to felt it was a logical extension of the basic premise of UTMA-allowed expenses. Accrued reimbursement is a possible path to using UTMAs strategically over the long term.

How Much is Extra?

As in many areas of law, there are significant ambiguities in allowed UTMA usage. Say a parent knows the only way they can afford to move into a larger home or buy a needed family minivan is with funds from their child’s UTMA. Is that a legitimate usage? On the one hand, the parent is obligated to house and transport their children safely and the child won’t get exclusive benefit from the purchases. But the child’s life will be much enhanced by living in a comfortable home and being driven in an appropriate vehicle. On this basis, some attorneys feel it is OK to use UTMAs even for such scenarios.

Taxes May Be Owed

It’s important to remember that access to UTMA funds doesn’t mean tax-free access. Depending on if and how the account was invested, removing large sums from an UTMA account may incur significant taxable income. Whether this income generates negative financial consequences is highly variable, dependent on a family’s tax bracket, reliance on social programs, and the relevant child’s age and circumstances. Before any large sums are cashed out, most people should schedule a conversation with their tax adviser. Sometimes it’s worth leaving well enough alone.

Good Custodians Keep Records

If a custodian takes a reasonable approach to managing their kids’ funds, a judge is unlikely to blame them for inadvertently stepping into some gray area or incurring an investment loss. An UTMA custodian isn’t expected to somehow be a legal, tax, and investment expert. One thing that is highly recommended, though, is keeping good records of any UTMA investments and expenditure decisions. Simply jotting down a thought process—the basic facts and figures being used to manage custodial assets—goes a long way toward showing that a good-faith effort was made. Maybe even clip this article and save it with your records to show you did some homework!

Crystal Clean

I’d guess that few parents take their UTMA obligations and restrictions too seriously. As noted, there’s virtually no oversight over them. But beyond the letter of the law (halachah and secular), kids are often more aware of money being held in their name than parents may imagine. And while for the most part, children will give their elders the benefit of the doubt, because of v’hiyisem neki’im (Bamidbar 32), it’s well worth being extra scrupulous. Especially if the ones doing the second-guessing may be those you love the most!


Want to dig deeper?

Try these related articles

UTMAs- The Benefits and Challenges of Child Custodial Accounts

Opportunity Funds: The Cash Stash to Grow With

Investing for Kids: Risky or Responsible?


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