What To Do When Gifts To Minors No Longer Fit: Adjusting UTMAs, 529 Plans, And Trusts When Family Goals Don’t Align

Author: David Haughton, JD, CPWA®

Guest Contributor

David Haughton, JD, CPWA® is Senior Corporate Counsel at Wealth.com, the industry’s leading end-to-end estate planning platform designed for advisors and their clients. Before joining Wealth.com, David acted as Team Lead, Advanced Planning at Commonwealth Financial Network®, Member FINRA/SIPC. He is a graduate of UMass Amherst and earned his JD at the Massachusetts School of Law. He is admitted to the Massachusetts and New Hampshire bar, as well as the U.S. District Court, District of Massachusetts, and the U.S. District Court, Court of New Hampshire. He is also a Certified Private Wealth Advisor® practitioner.

Read more of David’s articles here.

My daughter has lost seven teeth, so the tooth fairy has visited seven times. She has probably accumulated over $100 at this point (her haul is far larger than when I was a kid!). Spoiler alert (cover your children's eyes, please): Her parents – not the tooth fairy! – were the ones to actually contribute that money. Which leads to the question: As she is only seven years old, who does that tooth fairy money legally belong to? Is it hers? Is it mine?

Well, don't worry. In my mind, it will always be hers. But, in reality, it's questionable as whether legal ownership of money was transferred to the child unless I put it into an account that is registered as owned by her. But what if I were to take that money, open an account in her name, invest it for 14 years, and then it turns out she isn't well-suited to control the funds? In my mind, it's impossible that she won't turn out to be well-adjusted and successful. Which leads to yet another question: What flexibility do I want to have as to her future access and use of that money?

When a child is born, parents see endless possibilities for the child's potential. Could they be a doctor, a lawyer, an entrepreneur, a humanitarian… maybe even president!? Parents, of course, want to make sure their child has the resources available to pursue whatever can help them fulfill their potential and, most importantly, be happy. Therefore, the funding for a child's future may start at a very young age. Early funding provides the longest growth horizon to make sure sufficient time is allotted for significant funds to accumulate for later use.

Unfortunately, once the child reaches the age of majority, they may not have progressed in life as a parent hoped, and the child may be an inappropriate recipient of assets. If the parent made the wrong decision about how to transfer those assets when the child was a minor, their options may be limited to prevent the child from receiving a windfall at age 18 or 21 (depending on the age when the child may become entitled to the property, as determined by state law). Therefore, it is critical for advisors to be cognizant of how parent-clients transfer assets to their minor children – and of effective ways to deal with a client who may have already made disadvantageous gifting decisions.

Mechanisms To Transfer Assets To Minors

A minor's ability to legally own and control property is typically significantly limited until they attain the age of majority (i.e., the legal status of an adult), which is determined by the child's state of residence. Minors lack the legal capacity under the law to enter into contracts until they reach the age of majority and, therefore, are not able to enter into transactions or make legally binding decisions relating to property in their name. However, even though minors may lack access to assets titled in their name, it doesn't mean the property isn't still technically theirs. To say a minor cannot "own" property may be a bit of a misnomer, as it is really more that a minor is not permitted to control and make decisions regarding their property just yet. Accordingly, when a minor comes to legally own an asset, that asset is theirs forever, even if their access is delayed by statute.

Given these legal limitations, several mechanisms exist to transfer assets to minors while ensuring that the assets are properly managed until they reach adulthood. One common method is through Uniform Transfers to Minors Act (UTMA) accounts, which allow an adult custodian to manage the assets on behalf of the minor. Other vehicles, such as 529 plans and trusts, can also be used depending on the goals of the transfer. However, transferring assets to minors can introduce additional considerations, like the potential for kiddie tax liability, which applies to unearned income above certain thresholds and may impact the overall tax strategy.

How UTMA Laws Work

The Uniform Transfer to Minors Act (UTMA) was implemented to create rules regarding how the minor's assets should be held and administered, including the management, investment, and distribution of those assets. A minor may have come into possession of assets through any number of methods, including by inheritance, gift, personal injury awards, or even income through their own work. UTMA laws are designed to protect a minor's assets by placing a custodian in charge of overseeing the management of the assets until the minor reaches the UTMA termination age, at which point control of the assets shifts to the child.

The Uniform Transfer to Minors Act and the Uniform Gift to Minors Act (UGMA) are often confused, and the terms are sometimes used interchangeably. However, it's important to note that the UGMA laws formed the initial basis for how a minor's property was treated until UTMA laws overwrote many UGMA statutes and expanded the types of assets that could be held in custodial accounts.

Think of it like compact discs replacing cassette tapes – and how streaming has now replaced CDs. The primary difference between the UGMA and UTMA laws is simply the scope of allowable assets. While UGMA accounts were designed for financial accounts (such as savings or brokerage accounts), UTMA laws were designed to cover all types of assets, including tangible personal property and real estate. Since UTMA laws have now been adopted in all 50 states, the use of UGMAs has effectively become obsolete (much the same way the 529 plans made Coverdell accounts obsolete).

A critical distinction under UTMA laws is the difference between the age of majority and the age of termination for a UTMA account. Typically, the age of majority – when an individual is old enough to sign a legal contract – is 18 in most states. However, the UTMA age of termination is usually 21. For example, a parent could legally gift funds to their age-of-majority child at 18, but under UTMA laws, they could still have the discretion to withhold the funds until the child reaches age 21.

Nerd Note:

Many states have enacted legislation allowing UTMA accounts to extend the age of termination to 25. However, this higher termination age applies only if the donor explicitly selects it when establishing the account. Therefore, if a state updates its termination age options after a UTMA account is created, donors who would like to extend the age for future contributions may need to open a new UTMA account specifying the older termination age.

Funding A UTMA Account

UTMA accounts are one of the most common ways to save for a minor's future. This may simply result when new parents visit their bank intending to open a savings account for their child. Often, the bank representative will guide them toward opening a UTMA account.

Critically, any contribution to a UTMA account for a minor beneficiary is considered a completed gift for both gift and estate tax purposes. This means that once the contribution is made, ownership of the funds legally transfers to the minor beneficiary.

Kiddie Tax

Because contributions to a UTMA are considered completed gifts, the minor is treated as the taxpayer for any income generated by the account (e.g., capital gains, dividends). However, the IRS has special rules for the unearned income of a minor known as the 'Kiddie Tax'.

For 2025, the Kiddie Tax applies as follows:

• The first $1,350 in unearned income is nontaxable;
• The next $1,350 is taxable at the child's income tax rate (which is probably 0%); and
• Any unearned income over $2,700 is taxable at the parents' income tax rate.

This income can be reported by filing Form 8615 on behalf of the child or by electing to report the child's income on the parents' tax return.

Because the first $2,700 is not subject to significant tax liability, UTMA accounts can still offer some tax savings versus keeping the funds in the parents' account. However, the Kiddie Tax adds a level of complication and an administrative burden associated with managing income generated within the UTMA account.

Other Methods For Gifting To Minors

Importantly, UTMA accounts aren't the only way to transfer assets to provide for a minor's future. In fact, there are a variety of other vehicles that may offer more control and flexibility for the individual intending to transfer assets to the minor.

529 Plans

A 529 plan is an investment account that offers tax advantages for saving toward a beneficiary's educational needs. Compared to UTMA accounts, 529 plans offer greater flexibility in ownership but are much less flexible in how funds can be used.

The ownership flexibility lies in the account owner's ability to change the beneficiary of a 529 to another family member or transfer ownership of the account entirely. By contrast, a UTMA custodian cannot change the beneficiary of the account, as the assets irrevocably belong to the minor once contributed. However, 529 plans are more limited when it comes to distributions. While UTMA distributions can be used for a broad range of expenses as long as they benefit the minor, 529 plan withdrawals must be used for qualified educational expenses of the beneficiary to receive favorable tax treatment. Non-qualified withdrawals are subject to taxes and penalties, limiting how the funds can be used compared to the flexibility of UTMA accounts.

Importantly, there is a stark difference between a 529 plan registered under an adult's ownership and a UTMA 529 plan funded with a minor's own assets. The flexibility typically offered by a 529 plan, such as the ability to change beneficiaries on the plan, is not available with a UTMA 529 plan because the account is owned by the minor beneficiary, not the custodian.

Which means that UTMA 529 plans combine the tax advantages of a 529 with the ownership restrictions of a UTMA account. Once assets are contributed to a UTMA 529 plan, they are owned by the minor, and the custodian has no authority to alter the beneficiary or reclaim the funds.

Trusts

In addition to UTMAs and 529 plans, another common way to save for a beneficiary's future would be to fund a trust for the minor's benefit. This process tends to be more labor-intensive and potentially more costly than a UTMA account or a 529 plan. However, a trust – whether it be revocable or irrevocable – may represent the most protective way to provide for a child's future, as grantors have almost complete flexibility to craft the trust's language to align with the contributor's intentions regarding the control and ultimate distribution of the funds.

Revocable trusts allow the grantor to amend or revoke the trust at any time, offering the flexibility to retrieve the funds later if circumstances change or if the grantor identifies an alternative use for the funds. Since the grantor retains control, contributions to a revocable trust remain within the taxable estate of the grantor. As a result, assets in the trust are eligible for a step-up in basis at the grantor's death, potentially reducing capital gains taxes for heirs.

Irrevocable trusts offer less flexibility as to whether the beneficiary is 'guaranteed' to receive the funds. With an irrevocable trust, the grantor typically has much less flexibility to change the terms of the trust or allocate the funds to a different beneficiary if circumstances change. Whether contributions represent a completed gift for estate tax purposes depends on the trust's specific language and provisions. Some clients use irrevocable trusts to remove assets from their taxable estate and grow outside the estate until they are eventually distributed to the beneficiary. While irrevocable trusts reduce the grantor's control, they can offer valuable tax advantages and asset protection depending on how they are structured.

What Happens When A Minor Reaches The Age Of Majority

Reaching the age of majority – the legal threshold at which a person is considered an adult and can enter into contracts – is a major milestone in an individual's life. Along with reaching the age of majority comes the right to make independent decisions regarding property ownership. However, this can be a double-edged sword: while some young adults may be entrusted to make good decisions, legal adulthood is not always a marker of financial maturity or the ability to manage property prudently. Accordingly, it is important to understand the implications of a minor reaching the age of majority, and what rights they may gain over their property.

UTMA Accounts

UTMA laws require the transfer of ownership of a UTMA-registered account to the beneficiary once they reach a specified age. This requirement is relatively inflexible and not subject to the discretion of the custodian.

Specifically, the Uniform Transfer to Minor's Act language (adopted in substantially the same language across states) states:

the custodian shall transfer in an appropriate manner the custodial property to the minor or to the minor's estate upon the earlier of:

• the minor's attainment of twenty-one years of age with respect to custodial property transferred to a custodian nominated as provided in section three or transferred under section four or section five;
• the minor's attainment of majority under the laws of the commonwealth, other than this chapter, with respect to custodial property transferred under (i) section six; or (ii) section seven, except in the case of a transfer to a custodian nominated as provided in section three; or
• the minor's death.

This means that once the beneficiary reaches the state's statutorily defined age, they are no longer minors and are entitled to the assets in the UTMA account without restriction. If the custodian fails to relinquish the funds, the beneficiary could have cause for legal action to recover damages from the delay.

529 Plans

What happens when a beneficiary reaches the age of majority with a 529 plan depends on how the account is registered. As discussed, a 'regular' 529 plan is very different from a UTMA 529 plan.

With a traditional 529 plan, the beneficiary reaching the age of majority does not trigger any required change in account ownership or control. The account owner can continue managing the account well after the beneficiary reaches the age of majority and may even choose never to transfer the account or its funds to the named beneficiary.

By contrast, the ownership of a UTMA 529 plan must be turned over to the beneficiary at the UTMA termination age (usually 21). Although 529 plans have unique tax attributes and account rules, UTMA laws still apply. Therefore, the custodian has no discretion to retain control of the account once the beneficiary reaches the applicable termination age.

Trusts

The age at which a beneficiary gains control of trust assets depends completely upon the terms of the trust and the applicable trust code laws that govern it. This means that the grantor of the trust can have complete flexibility to determine whether – and when – a beneficiary will assume control of the trust funds.

Common Issues When Minors Reach The Age Of Majority

Many parents fund UTMA accounts fully aware of when their child will gain access to the assets. However, the decision to transfer assets to a minor is often made before there's a clear sense of how mature the minor will be when they become eligible to receive them. As many parents unfortunately discover, once the minor reaches the UTMA termination age, they may be unprepared to manage the money responsibly – or may face personal risks that could lead to the premature dissipation of the funds. However, there is little recourse to prevent them from accessing the assets.

Custodians of UTMA accounts or trustees may have a strong desire to retain control of the funds that are otherwise due to be transferred to the beneficiary. While this motivation may come from the noblest of intentions – like protecting the beneficiary from self-destructive behaviors like excessive spending, substance abuse, or gambling – choosing this course of action could expose the fiduciary to a litany of legal liability. Failing to turn over the property to the minor could be considered a breach of fiduciary duty, subjecting the custodian to potential legal consequences.

However, concerns about maturity and financial responsibility aren't the only reasons parents might hesitate to transfer assets outright. Sometimes, the disadvantages of transferring funds could be due to reasons that even beneficiaries themselves would endorse! When ownership of assets is turned over to a child individually, those assets become a part of their taxable estate. And this may not be ideal for them, depending on their financial situation – it may be more advantageous to structure the transfer in a way that keeps the assets out of their estate while still allowing them access to distributions.

For example, consider a family with a $30 million estate and a single child. The parents may implement extensive estate tax planning to limit their own estate tax liability. However, if part of their strategy is to gift assets outright to their child (or to pass everything at death), those assets would now be included in the child's Federally taxable estate – creating a new potential estate tax burden for the next generation. To mitigate this issue, the parents may elect to use an irrevocable trust, which ensures the assets remain outside the child's estate while still providing for their benefit. Generation-Skipping Tax (GST) considerations would dictate how such a trust is structured and funded.

Custodians and financial advisors must be aware of both UTMA laws and the applicable custodial policies of institutions holding the accounts. Some financial institutions may send notices or freeze account activity on a UTMA account once the beneficiary reaches the termination age. However, in many cases, it is entirely possible that no automatic triggers will prompt the UTMA custodian to transfer the funds. A mounting liability could result from a failure to recognize that the custodian is in possession of funds they should not be holding. Therefore, it is critical for advisors to implement a system for identifying UTMA accounts under their management and to provide appropriate notice to custodians about their legal responsibilities regarding the transfer of ownership.

Some advisors might consider moving UTMA funds into a trust as a workaround to extend the period before the beneficiary can access the assets. However, unless this strategy is carefully executed in accordance with the law (2503(c) trusts will be discussed later), restricting a beneficiary's access beyond the UTMA termination age could violate legal requirements and expose the custodian to liability for improperly handling the funds.

Strategies To Gift To Restructure Gifts That Were Already Made

While the law "is what it is" as it relates to a custodian's obligation to transfer funds to the minor beneficiary once they reach the age of termination, there are strategies to address situations where the original git no longer aligns with the family's goals. As with almost any concept, judicial intervention may be an option if the custodian can convince a judge that there are compelling reasons that funds cannot pass to the beneficiary. However, this process can be costly and unpredictable, and there are other methods to manage or reposition assets to deal with a regrettable gift to a minor. The effectiveness of these strategies depends on the time remaining before the beneficiary reaches the age of termination. Options are more flexible when the beneficiary is younger – say 15 years old with six years until termination – compared to when they are just months away from reaching the applicable age and gaining access to the assets.

Spending UTMA Money On Expenses For The Minor

Many parents fund and grow UTMA accounts with the intention of preserving the assets prior to the transfer of the account to the child. However, custodians still retain the power to use the assets for the minor's benefit until the custodianship ends. Which means that if parents regret their decision to fund a UTMA, they can reduce or eliminate the balance by spending assets on the child's expenses – expenses they would have otherwise paid out of pocket

This strategy doesn't necessarily reduce the amount ultimately received by the minor; rather, it can serve as a way to 'reposition' the funds from being subject to the restrictions of the UTMA laws to being fully controlled by the parent. For example, parents might spend UTMA funds on expenses for the minor and then deposit an equivalent amount into a non-UTMA account over which they have full control. This could be a trust account or even an account individually registered to the parent, with a mental note that the funds are earmarked for the child. Importantly, if a parent decides to take this route, they should ensure their estate plans reflect the intended purpose of these funds to avoid the assets being lumped together with the rest of their general estate should something happen to the parent.

Importantly, a UTMA custodian who is also the parent of a beneficiary should be aware of their legal support obligations. Courts typically expect parents to cover basic needs such as food, clothing, and housing. So, if a parent elects to deplete a UTMA account by paying expenses for the beneficiary from the account, they should avoid using the funds for expenses traditionally associated with the basic support of the child. Otherwise, using funds for basic support expenses may be challenged if viewed as avoiding parental responsibilities. Instead, custodians should focus on using UTMA assets for expenses outside traditional parental obligations, like summer camps, private tutors, or purchasing a vehicle for the child.

Transferring UTMA Assets To A UTMA 529 Plan

Another avenue to explore for parents who may regret funding a UTMA account is to move the funds into a 529 account. However, because the funds are already subject to UTMA laws, they must be transferred to a UTMA 529 account. While this doesn't eliminate the requirement to transfer the account to the beneficiary at their age of termination, it does introduce disincentivizes for the beneficiary to withdraw from the account prematurely. Withdrawals for non-qualified educational expenses will trigger negative tax consequences, which may discourage frivolous use of the funds.

Importantly, 529 plans can only be funded with cash, so an in-kind transfer of investments from a UTMA account is not possible. Custodians seeking to move UTMA funds into a 529 plan must first liquidate the UTMA assets before transferring the funds, which could trigger kiddie tax implications if the gains are substantial.

Converting The UTMA Account To A 2503(c) Trust

A less common but effective strategy to extend the age of an otherwise inflexible UTMA termination age is to convert UTMA assets into a 2503(c) trust. This trust gives the beneficiary a limited window of withdrawal – usually 30 to 60 days – upon turning age 21. If the beneficiary does exercise this right, then the funds can remain in trust until a later age, offered continued protection and oversight.

However, custodians should note that the trustee has a fiduciary duty to notify the beneficiary of their withdrawal rights. This concept is similar to the 'Crummey' provisions in Irrevocable Life Insurance Trusts (ILITs), where beneficiaries have a limited time period to withdraw contributions to the trust to qualify for the gift tax annual exclusion. Like Crummey trusts, 2503(c) trusts are authorized to constitute a present interest gift under the Internal Revenue Code, maintaining favorable gift tax treatment.

Modifying A Trust That Holds Gifted Assets

In some cases, instead of gifting assets through a UTMA account, parents or other family members may have used a trust to hold assets for the benefit of a minor. When a trust is used in this way, the options to change how or when the beneficiary is entitled to distributions of property depend on the type of trust and its provisions.

If the trust is revocable, the answer is relatively straightforward – the grantor can amend or restate the trust at any time to adjust the distribution provisions or change the beneficiaries. However, if the trust is irrevocable, the options to change or re-direct the beneficial interest may be more limited. That's not to say that irrevocable trusts are set in stone – there are legal mechanisms that can provide flexibility, even after the trust has been funded.

Power Of Appointment

If the trust has a 'power of appointment' provision, the grantor may be able to change the distribution provisions of a trust. A power of appointment permits a party to a trust to either re-direct distributions to another beneficiary or to change the way in which an existing beneficiary is entitled to trust property. From a tax perspective, power of appointment provisions are carefully crafted as either limited powers of appointment, which prevent assets from passing through someone's taxable estate, or as general powers of appointment, which make sure assets pass through someone's taxable estate. The power of appointment is usually exercisable through either the powerholder's last will and testament or a separate document that references the power.

For example, let's say Michael created an irrevocable trust, which was set to distribute assets equally to Michael's children – Dwight, Jim, and Pam – upon his death. However, over time, Michael realizes that Dwight may be self-destructive with any trust distribution he receives and would prefer the assets be allocated to just Jim and Pam, who have both demonstrated financial responsibility. If the trust includes a power of appointment, Michael can use his will to exercise the authority and redirect the trust property so that it's distributed only to Jim and Pam in equal shares, excluding Dwight from the distribution altogether.

A power of appointment is not the only way to change an irrevocable trust. Depending on the type of trust and its provisions, the grantor may have options to modify the terms of the trust through mechanisms like decanting or a non-judicial settlement agreement. However, the ability to make such changes often depends on how the trust was originally drafted. It's important for grantors to plan for future flexibility when creating a trust, ensuring that there's room to adapt if circumstances change over time.

While funding a UTMA account for a child can be an effective way to provide for their future, it's not uncommon for parents to reconsider this decision as the child approaches adulthood. Anticipating potential risks – such as possible worst-case scenarios associated with the child having unfettered access to the funds at age 21 – and choosing flexible savings options from the outset is often the best approach.

However, for those who have already funded a UTMA or trust and are concerned about future access, it's important to take proactive steps early. Exploring legal options to adjust or restructure the gift can help limit the amount the child will be entitled to when they reach the applicable age. The closer the beneficiary gets to gaining legal access, the fewer options will be available, making early action critical for preserving flexibility.

Ultimately, the key point is that thoughtful planning – whether before or after a gift is made – can help ensure that the assets serve their intended purpose: supporting the child's future in a way that aligns with the family's long-term goals. And by staying informed and proactive, parents and advisors can navigate these decisions with confidence, creating opportunities for both financial security and personal growth!