How do I name a custodian for my minor child as the pay on death (POD) or transfer on death (TOD) beneficiary of my bank account?
If you have a minor child, but do not have a trust in place, then there is a temporary workaround you can use to protect that bank account (or any other financial account or life insurance you might have) for the benefit of your minor child.
Under the uniform transfer to minors act (UTMA) a person may leave your bank account to a custodian to be held for the benefit of your minor child in accordance with state law. Such state law can be helpful if you don’t have a trust, but still need a way to leave money behind to a minor beneficiary (whether it be your child or a niece / nephew) without having complications arising from the fact that such minor child can’t legally own such property at that time if something were to happen to you.
To avoid this predicament, under the Uniform Transfers to Minors Act (UTMA) you would appoint a person (known as the custodian) to be able to manage the account for the benefit of the minor until they reach the age specified in the law of state that applies to the UTMA. For example, in Massachusetts, the property can be held under a UTMA custodial account until the minor child reaches age 21. So your custodian would manage the money for the benefit of your child until he or she turns 21, at which point your child is no longer consider a minor and is then legally entitled to receive any and all money held in such a custodial UTMA account outright.
Nolo provides a good example of what naming the account beneficiary looks like when using the UTMA for stock ownership (but the same can generally be applied for any checking / savings / investment account your may own):
“Tess wants to leave stock to her ten-year-old nephew, Sam, but wants his mother to manage it if Sam inherits it while he is still a [minor] child. On the ownership registration document, she names the TOD [transfer on death] beneficiary as "Amelia Tompkins, as custodian for Samuel Tompkins under the [Massachusetts] Uniform Transfers to Minors Act."
So is there any drawback to using the UTMA to allow a custodian to manage your assets for the benefit of your child if something happens to you?
Well two things:
Distribution age. For most parents, the age may seem too young for a child to receive substantial amounts outright. Most 21 year olds simply don’t have the financial maturity or experience to handle hundreds of thousands of dollars (although some may surprise you). If you have a life insurance policy or are leaving over $200,000 to a minor child, then that’s where most parents would consider the amount to be too much for a custodial account arrangement.
Lack of clarity. It can be ambiguous as to what your intentions are for both the child and for the custodian of the account. Do you want the money to be used only for certain essential items prior to the distribution age? Or should the custodian have the freedom to use funds in a more discretionary manner? What happens if the child and the custodian disagree? What happens if the custodian is no longer able to serve as custodian? How would a new custodian be appointed?
These two questions make parents nervous about relying on UTMA as a longer term solution.
So what's the longer term solution if you don’t feel comfortable with using a UTMA?
If you are a young family just starting out, then relying on UTMA laws can be a convenient temporary solution to your estate planning needs. The money in such accounts might be so low that a trust seems like overkill. However, if you have substantial assets or real estate that make such option less feasible (which applies to most parents over age 35 at the time of this writing), then you can do a simple revocable trust to provide clearer instructions, better contingency planning, and a higher distribution age (most parents pick somewhere between age 25 to age 35). With the right trust in place, you’ll have peace of mind in knowing that a variety of contingencies have been addressed and your minor children will be taken care of.
If you’re interested in learning more about your estate planning options, give me a call at 781 202 6368, email jlento@perennialtrust.com, or click here to schedule your free personal consultation.
I’m always happy to help,
Joseph M. Lento, J.D.
Your Local Estate Planning Attorney
www.PerennialEstatePlanning.com
477 Main Street
Stoneham, MA 02180
For another great article on potential drawbacks of a UTMA, check out
