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Question

Difficulty: MediumCustomer Account Types and Ownership Structures

An investor opens a custodial account under the Uniform Transfers to Minors Act (UTMA) for her nephew. When the nephew reaches the state's age of majority, the custodian asks the broker-dealer to transfer the account funds into her own personal account as reimbursement for past college preparation expenses she voluntarily paid on his behalf. Which of the following statements correctly describes the status of the account assets and the custodian's authority?

  1. The account assets constitute an irrevocable gift that belongs solely to the beneficiary, and full control of the account must be transferred to the young adult upon reaching the age of majority.Answer
  2. B
    The account automatically converts into a Joint Tenants in Common (TIC) account between the custodian and beneficiary, allowing equal withdrawal privileges to both parties.
  3. C
    The broker-dealer must place a temporary hold on the account and allow the custodian to withdraw disbursements to cover past educational expenses.
  4. D
    The custodian retains discretionary authority to transfer the funds to any account under her control until the beneficiary submits a formal Regulation S-P privacy notice.

Answer

The account assets constitute an irrevocable gift that belongs solely to the beneficiary, and full control of the account must be transferred to the young adult upon reaching the age of majority.
Under UGMA/UTMA rules, any asset deposited into a custodial account is an irrevocable gift that belongs exclusively and indefeasibly to the minor beneficiary. Once the beneficiary reaches the state-mandated age of majority, custodial authority terminates, and the broker-dealer must transfer sole control and registration of the assets directly to the beneficiary. A custodian may not withdraw funds for personal reimbursement of prior voluntary expenses.

Step-by-Step Solution

1
Identify the account ownership structure and rules under UTMA.
Under UTMA/UGMA, all contributions to a custodial account are indefeasibly vested and represent an irrevocable gift solely for the benefit of the minor.
Custodial accounts have only one minor beneficiary and one custodian at a time, and gifts cannot be revoked or taken back by the donor or custodian.
2
Determine the custodian's legal obligations when the minor reaches the age of majority.
When the beneficiary reaches the statutory age of majority, the custodian's authority terminates, and the broker-dealer must register the account in the beneficiary's name alone.
The custodian cannot use custodial funds for self-reimbursement of past voluntary expenses or maintain ownership control after majority.

Key Concept

UTMA/UGMA Custodial Account Ownership and Irrevocability
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Topics

Customer Account Types and Ownership Structures