In many instances, companies and brokerages will not issue stocks, bonds or other securities to minors under the age of eighteen (18). There are also many instances, such as the death of a relative, when minors become entitled to receive substantial amounts of cash or other property. Before allowing a minor to receive such property, courts will often require some type of guardianship or custodial arrangement.

One way minors can own securities (and many other types of property) is under the uniform transfers to minors act (UTMA). This act allows the establishment of a custodial arrangement where an adult (or a trust company), the "custodian" keeps and manages the minor's property until the minor reaches a certain age. Then, under the terms of the act, the property must be given to the minor. The current law requires the custodian to turn the property over to the minor upon their reaching age twenty one (21). [Note: The Tennessee legislature has recently amended the UTMA so that it can remain in effect until the minor reaches age twenty five (25); however, at this time, the amendment has not been signed by the Governor.]

To make a gift of securities or other property under the uniform transfers to minors act, you must designate the custodian and signify the creation of the custodial arrangement by using the words: "to Joe Jones, Sr., as custodian for Joe Jones, Jr., under the Tennessee uniform transfers to minors act." The words sound confusing and unnecessary but they are required to avoid confusion with other ownership arrangements and to give the minor the protection of the act. Stock may be registered in this manner, bank accounts can be opened with this language or the designation can be made in some other document. The language can also be used in a will so that minor beneficiaries can receive property not valuable enough to justify the creation of a formal trust.

Remember, however, that use of this language creates an irrevocable gift that can never be taken back. Anytime the amount of property is substantial, the gift should be examined with respect to the possibility of creating gift tax liability. At the same time, if you name yourself as custodian, any property held as custodian may be included in your estate for estate tax purposes.

The act allows the custodian to manage and invest the minor's property but requires the custodian to exercise the same standard of care as a reasonably prudent person. The custodian may use the minor's property for the support, education and benefit of the minor. If the custodian refuses, the minor or other interested person can petition the court for an order requiring the custodian to use so much of the property for the minor's benefit as the court finds advisable. Custodians are also required to keep the minor's property separate and to maintain accurate records of all transactions.
When the minor reaches the designated age, the custodian must transfer the property to the minor, who is now, legally, an adult. This is one disadvantage of the custodial arrangement in comparison to a trust. A formal trust can provide that distribution of the property will not occur until a later age, when the minor is better capable of managing his money. In many instances, a trust will provide periodic distributions as the minor gets older. As a general rule, formal trusts are more flexible than a custodial arrangement under the act but are more complicated and expensive.
So long as he did not appoint himself, a custodian is entitled to receive a reasonable fee and reimbursement for any expenses he incurs. A custodian may resign and designate his successor or, if a custodian dies and the minor has reached the age of fourteen (14), the minor can appoint a successor. If there is reason to believe that a custodian is misusing or mismanaging the minor's property, a petition can be filed asking the court to remove the custodian and designate a successor.

The uniform transfers to minors act is a very valuable way of providing minors with the ability to receive and own property. The custodial arrangement is not difficult or expensive to create and offers the minor some protection. However, it may not be the best alternative in every case and is not designed to cover every possible situation. For instance, homes, land or other real property cannot be transferred in this manner.

If you are interested in transferring property of substantial value to a minor, you should consult an attorney experienced in the area of custodial arrangements and trusts.

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The information available through TBALink LawBytes is basic legal information and is not a substitute for legal advice. LawBytes is provided by the Tennessee Bar Association as a public service and for general information only. It should not be considered legal advice. You should consult your attorney if you have questions concerning any specific situation. If you do not have an attorney, may we suggest that you contact your local bar association's referral service. The topics covered through TBALink LawBytes will provide basic information and should make it easier for someone with a problem to decide whether they need professional help from a lawyer or if another agency could provide them with assistance.