United States: The UTMA Quagmire

It was the Uniform Gift to Minors Act. Then it became the Uniform Transfer to Minors Act. The goal was the same. To permit parents to set aside money for their children until they attained their majority or to use it for their benefit along the way. A rainy day or a college fund for kids. Seems like a good idea.

Ah, necessity is the mother of invention and the road to hell is paved with good intentions. The last time we visited this issues was in 1993 when Mrs. Perlberger was ordered by the divorce court to reimburse her children's' then UGMA accounts.

In Perlberger v. Perlberger, 626 A.2d 1186 (1993) the divorce court found that a custodian had improperly depleted the children’s Pa. Uniform Gift to Minor’s Accounts by expending funds for non-necessities such as family trips, condominium expenses, child care, entertainment, pool expenses, legal representation in custody matters, and the custodian's own therapy. In her appeal, she contended that the trial court utilized the incorrect standard when it assessed whether to order reimbursement based upon a determination of whether the expense was a necessity. Wife contends the correct standard is whether the expenses were for the benefit of the minor and relied upon section 5305(b) of the Pennsylvania Uniform Gift to Minors Act. The custodian in that case had taken $76,000. The Trial Court ordered that $52,000 be restored.

In Sutliff v. Sutliff, 528 A.2d 1318 (Pa. 1987), the Pennsylvania Supreme Court explained that, unlike a trust which must be used for a stated purpose, PUGMA property and proceeds may generally be used by custodians for the support of children. Id. 528 A.2d at 1323. It is, however, the custodian’s duty to use the [P]UGMA property for the child’s benefit. 20 Pa.C.S. § 5305(b). Sutliff prohibits a parent/custodian from invading the custodial assets to fulfill a parent’s own support obligation where the parent has sufficient means to discharge it himself. 528 A.2d at 1320. It does not, however, bar absolutely a custodian’s use of the funds in relation to a support obligation, court ordered or otherwise. Therein lies the challenge; where is that line drawn?

During the Perlbergers’ separation and divorce proceedings, the children may in fact have benefitted from trips to Washington, D.C. to visit relatives, or vacations and summers with friends at the beach house. "If economically feasible, whatever aspects of the children’s lives that can remain stable, should. The uses to which wife put the custodial assets she borrowed may be extravagant to one of conservative means or taste, but we cannot conclude from the sparse record on this issue that wife’s actions were neither reasonable nor for the benefit of the children. We do not dispute that certain expenditures were an invasion of the custodial assets and clearly were not used for the children’s benefit, i.e., wife’s therapy or legal fees." Nonetheless, the appellate court agreed with wife’s argument that the trial court imposed its own standard in ordering reimbursement to the accounts. The appeals court remanded expressing. particular concern with the $30,000.00 which was used to pay the mortgage and condominium expenses for the vacation home in Margate, New Jersey. The vacation home was marital property. Wife testified that she paid the mortgage, fees and expenses to maintain the vacation home during the parties’ separation. So, the case was remanded and the ultimate result lost in the mists of time.

Now we have Werner v. Werner, a reported panel decision issued in early October. The Werners adopted two children and, in happier times, funded UTMA accounts for each. In 2009 they separated. It is axiomatic that for almost every couple, physical separation creates economic strain. It is equally true that most parents adopt the view that innocent children should not do without because their parents chose to separate, so we have children who have a lifestyle expectation, coupled with parents who face economic difficulty caused by the need to now fund two homes and an undesignated pot of money that could "bridge the gap."

Ten months after separation Mrs. Werner, the custodian-mother, withdrew $253,000 of custodial funds and purchased a $235,000 home. A few months later she sued for divorce. The trial court quickly entered an order preventing further use of the UTMA funds.

In August, 2013, the child beneficiaries, then ages 18 and 19, (based on the opinion) sued to secure an accounting. The home purchased with the custodial funds had just been sold for double what custodian-mother paid for it and the court directed that the proceeds be escrowed except for $100,000 made available to mother. When the hearings were held on the claims for accounting and damages, the children also requested that they receive attorney's fees on the basis that mother's conduct was in bad faith. After hearing attorney's fees were denied but the Court directed that the proceeds from the home be paid entirely to the UTMA account even though there was evidence that mother had put some of her own money (not defined) into the home.

While it was clear that the new home had been titled to mother and not the UTMA or the children, mother argued that this was not a breach of fiduciary duty and that the children suffered no harm while provided with a place to stay. She further notes that she could not afford to remain in what was the marital residence. The appellate court notes that one child never occupied the substitute home.

In the end the Superior Court affirmed the Trial Court ruling awarding to the child beneficiaries all of the proceeds from the sale of the home their custodian mother acquired with what was clearly "their money" in 2010 when she made the purchase. Ironically, mother spoiled her own case. First she certainly risked the money by titling the property in her name. Hopefully there was homeowner's insurance to protect from a casualty loss. But retitling the home deprived the children of the asset protection UTMA otherwise affords. Second, mother kept no records of her contributions to the investment. She described improvements she paid for to the home but did not prove the value of those improvements. So, ironically, she doubled the value of the accounts through her somewhat risky investment but had to pass on all of the benefits, losing her contribution to it along the way.

The other tipping point that may have played into this was the fact that the children were 15 and 16 years of age when she drew the funds in 2010. Mother knew that college was not far away and the opinion tells us that the children had to essentially self-fund college while this case was decided because of mother's investment choice. She did sell in 2013 which may have been undertaken to convert to cash and pay tuitions. The children's' suit intervened.

The children cross appealed claiming attorneys' fees under Section 5319 of the UTMA or Section 2503(7) of the Judicial Code (Title 42). Mother's response had been that she had not acted improperly. The Trial Court refused attorneys' fees because the conduct of mother was not egregious. The Superior Court agreed and added that while mother's legal positions were not commendable, they were not "legally untenable." Pregnant in the ruling was the fact that the $250,000 UTMA account had appreciated by 15% per year from 2010 to 2015. Of course, the money would have doubled in an S&P index fund during the corresponding period.

The problem here is that we still don't know where the line is drawn. Is it acceptable after separation to rent the same seashore cottage that was part of family lifestyle while the marriage was intact? If father won't provide a car either alone or on a shared basis with mother, is it suitable to use UTMA funds to buy a car for a minor? The opinion in this case makes reference to an intention to use the funds for college. (fn 1). But UTMA does not really address that issue. And if a mature child is clear that he or she has no intention to secure post-secondary education, does the standard of how money is used become more lax. Obviously, the standard does not. But will the fiduciary be judged differently if post-secondary education is not in the cards? These are very real questions that attorneys and clients grapple with every day. Unfortunately, the appellate cases decided seem to provide little guidance. Meantime, we may be guided by the sage advice of Sergeant Esterhaus when his wife tapped the UTMA to pay for the scuba trip to Bimini: "Be careful out there."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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