Uniform Transfers to Minors Accouts (UTMA) accounts are an easy and inexpensive way for parents, grandparents and other well meaning individuals to make irrevocable gifts to minors without the expense of creating a formal trust.
They are easily established by opening the account in the custodian’s name “as custodian for [name of minor] under the Texas Uniform Transfers to Minors Act.” The custodian then manages the account under rules established by state law. The account terminates when the child turns 21 (or 18 if the assets in the account were transferred by a fiduciary or as a result of a debt owed to the beneficiary).
UTMA Accounts Can Be Problematic For Children With Special Needs
But for children with special needs, these accounts can be a problem.
UTMA accounts are legally owned by the child. According to Social Security regulations, assets in the account are generally not counted as a resource before the account terminates. However, when the account terminates the funds remaining in the account immediately become a countable resource, which means that a disabled child’s means tested benefits may be jeopardized.
What To Do If a UTMA Account Has Already Been Established
If a UTMA account has already been established, and the account will soon terminate, there are several things you can do preserve the disabled child’s benefits:
- It may be possible to spend down funds in the account on supplemental benefits such as summer camps, recreational problems, and vacations.
- It may be possible to purchase non-countable resources for disabled beneficiary, such as a vehicle or household furnishings.
- It may be possible to transfer funds in the account into a self-settled special needs trust or pooled trust. Restrictions associated with this type of trust include a payback provision, designed to reimburse state for Medicaid benefits upon the beneficiaries death.
Supplemental Needs Trusts
To avoid these problems, it is best gifts to a disabled beneficiary be made to a supplemental needs trust, rather than a UTMA Account. Support trusts, which direct that funds be used for the health, welfare, and support of a beneficiary, can disqualify a disabled child because the government can require that trust funds be distributed from the trust to replace government benefits.
A Supplemental Needs Trust, however, is a discretionary trust that allows a trustee to use trust funds to supplement a beneficiary’s government entitlements. Although money from a special needs trust cannot be used to pay for the beneficiary’s basic needs such as food and shelter, it can be used to pay for things such as vacations, computers, haircuts, tickets to sporting events, and medical and health costs not covered by Medicaid, thereby preserving government benefits, while enhancing the quality of the disabled person’s life.