What Counts as a UTMA Qualified Expense?

A Uniform Transfers to Minors Act (UTMA) account is a custodial account established to hold and protect assets for a minor. These accounts provide a way to give assets like money, securities, and even real estate to a child without the complexity of a formal trust. An adult, known as the custodian, is appointed to manage the account on the minor’s behalf. The custodian controls the assets, making investment and spending decisions until the minor reaches the age of termination, which is typically 18 or 21, depending on the state. At that point, the assets become the sole property of the child.

The Benefit of the Minor Standard

All expenditures from a UTMA account are governed by the “benefit of the minor” standard. This rule means the custodian has a fiduciary duty, a legal obligation to act in the child’s best financial interests. Every withdrawal must be for the use and benefit of the child who owns the account. This standard is intentionally broad, allowing flexibility to cover expenses appropriate for the child’s well-being.

A custodian who uses funds for their own benefit or in a way that doesn’t serve the child’s interests can be held legally liable for breaching their fiduciary responsibility. The standard requires prudent management but does not limit spending to a specific list of pre-approved items, instead providing a legal framework to guide the custodian’s judgment. The assets legally belong to the minor, and the custodian is simply the manager.

Permissible UTMA Expenditures

UTMA funds can be used for a wide range of expenses that provide a direct benefit to the minor, particularly those that fall outside a parent’s ordinary support obligations. These expenditures are often for items and experiences that enrich the child’s life, development, and education. The flexibility of the UTMA standard allows for varied uses, provided the benefit to the minor is clear.

Significant purchases for the child can also be permissible. For instance, buying a computer for educational purposes or purchasing a reasonably priced car for a licensed teenager to get to school or a job would qualify. Common examples of permissible expenses include:

• Tuition for private K-12 schools or college
• Specialized tutoring and study abroad programs
• Summer camp, music lessons, or art classes
• Sports league fees and equipment
• Funding a trip for the minor’s benefit

Prohibited UTMA Expenditures

The primary restriction on UTMA spending is the parental support obligation. UTMA funds cannot be used for expenses that a parent is legally required to provide for their child. These are basic necessities that a parent must cover from their own resources. Using the child’s money for these items is seen as benefiting the parent, not the child, which is an improper use of custodial funds.

The account is meant to provide for extras, not to relieve a parent of their financial duties. Misusing UTMA funds to cover these basic obligations can lead to legal challenges and require the custodian to reimburse the account. Prohibited expenses include:

• Basic food and shelter, such as rent or mortgage payments
• Standard clothing
• Routine medical and dental care
• Insurance premiums and co-pays that a parent is expected to cover

Custodian Responsibilities and Record Keeping

A custodian’s fiduciary duty includes diligent administration of the UTMA account, which requires record-keeping for every transaction. This documentation is a legal requirement to demonstrate that all expenditures adhere to the “benefit of the minor” standard. Proper records are the custodian’s defense against any future claims of mismanagement.

For each withdrawal, the custodian should record the date, the amount, and the specific purpose of the expense, including a note on how it benefits the minor. Receipts, invoices, and other relevant documents should be retained. This information is necessary for tax purposes and serves as a clear history of the account’s management.

These records must be available for inspection by the minor’s parent or legal representative, and by the minor once they reach legal majority. Keeping custodial property separate from the custodian’s own assets is also a requirement. Failure to maintain accurate records can result in legal action, potentially requiring the custodian to provide a formal accounting to a court and reimburse the account for unsubstantiated withdrawals.