Problems arise when gifting money to grandchildren

Dear Len & Rosie,

Years ago when our first grandchild was born, my husband and I bought a custodial account. As the years have past the parents of this grandchild are no longer married and we are not allowed to see him. I would like to close this account, as I feel that the mother will spend the money on herself when our grandson turns 18. We feel very strongly that she does not deserve any of the money. How can I cash in this account? I’m told custodial accounts are impossible to end.

Dona

Dear Dona,

Your grandson’s custodial account is an account created under the California Uniform Transfers to Minors Act, sometimes referred to as the UTMA. The primary advantage of UTMA accounts is that they are really simple. You or anyone else may give money, securities, or other assets to a minor, without the expense of creating and administering a trust.

Money in your grandson’s UTMA account is held under his Social Security Number, rather than a taxpayer identification number assigned by the IRS. Any income earned by the UTMA account is taxable to your grandson, instead of being taxed at the trust tax rate, and it’s extremely unlikely that there’s enough income to require filing an income tax return on your grandson’s behalf.

The downside of a UTMA account is that it’s no longer your money, even if you named yourself as custodian. The account is owned by your grandson. You may spend money from the custodial account on your grandchild, but you can’t take it back for yourselves. If you do so, you are committing a breach of fiduciary duty for which you may be sued, and you could even be criminally prosecuted for theft.

If either you or your spouse is the custodian, all you can do is to manage the money and turn it over to your grandson when he turns 18 unless you set up the account to hold his money until he reaches age 25. Do so discreetly and maybe his mother won’t get his hands on it. If the mother is custodian, you’re in a more difficult position. While your grandson is entitled to an accounting of his mother’s actions as custodian, you’re just the donor, and you have no rights at all. And forget about being able to fire her as custodian without cause. You need to prove that the custodian has already stolen from the custodial account.

The lesson here is that if you wish to make gifts to minors, you need to weigh the risks and benefits of each method of doing so. UTMA accounts are easy, but cannot be taken back once made. A gift made via a revocable trust is best from the perspective that you may retain the right to change or modify the gift up until your death, but the gifted money is subject to estate taxes, if you are wealthy enough, and the claims of your creditors.

A very good option is to create a 529 Plan, via www.scholarshare.com. It’s an educational fund that grows tax-free until money is distributed to pay for the educational expenses. You can also pick your own successor participant to manage the account in the event of your death or incapacity. With a 529 plan, you could have ensured that the money you gifted to your grandson would be used solely for educational purposes.

Finally, remember that it’s not your grandson’s fault that you are not allowed to see him, and that if you are the custodian of his account, there must surely be a way to get him the money without it passing through the grubby hands of his mother.

Len & Rosie

When your brother borrows money from Mom and won't pay it back

Dear Len & Rosie,

I have a 91-year-old mother and five siblings. My oldest brother has borrowed money from my mother on a few occasions and has stated that he has no intention of ever paying her back. There is no documentation on the loans and as executor of my mother’s will I need to know how to assure this debt is deducted from his share of the estate. The second issue is the same brother has a judgment against him for back child support. At the time he went to court for the back child support he put his house and assets in his son from his second wife’s name so now he shows no assets. I believe he is collecting Social Security as well. If and when our mother passes awayhow can I assure that his debt to his ex-wife will be repaid or will he try to give his share to his second wife’s children.

Steven

Dear Steven,

When your mother passes and you become executor of her will or the successor trustee of her trust, you’ll have to follow the rules. You can’t simply deduct money from your brother’s share just to make it fair. A gift made by a parent to a child doesn’t count as an advancement against that child’s inheritance unless there is good evidence that this was your mother’s intention when she made the gift.

And if it’s been more than two years since your brother said he wouldn’t ever pay back the loans, it’s too late to sue him for a breach of contract. But it’s not too late. If your mother hasn’t lost the ability to make decisions, and if she’s willing, she should see an attorney to update her estate plan and spell out exactly how much money she wants deducted from her oldest son’s share to make up for what she gave him over the years.

Keep in mind that it’s your mother’s choice, not yours. The only definition of what’s fair that applies here is the one in her mind and in her heart. She may be unwilling to reduce her son’s inheritance. Some children just need more help than others. Also, if your mother decides to reduce your brother’s share, she should see the attorney alone, without you being there. Otherwise, you may be accused of undue influence and your mother’s updated estate plan may be invalidated.

As for your brother’s child support arrearage, most wills and trusts include a “spendthrift” clause that prohibits beneficiaries from assigning their interest in the trust or estate to anyone else, either voluntarily or involuntarily. These spendthrift clauses have the effect of protecting a beneficiary’s inheritance from creditor claims.

It seems completely unfair to parents owed child support that a spendthrift clause can prevent them from collecting on a child support claim. Fortunately, the courts agreed and voided spendthrift clauses against child support claims, and the Legislature also enacted California Probate Code section 15305 to cement the deal. As long as your brother’s ex-wife properly files a claim against your mother’s probate estate or trust before the money is distributed to your brother, she’ll get paid first out of his share.

Len & Rosie