LEGAL GUIDE
Written by attorney Anne Debelius Lopiano | Dec 26, 2010

Use the Maryland Uniform Transfers to Minors Act to Provide Life Insurance Proceeds For Children

The Maryland Uniform Transfers to Minors Act (MUTMA) is a statute in the laws of Maryland which (among other purposes) enables parents to designate their minor children as death beneficiaries either under a Will, or a death beneficiaries of financial accounts or of life insurance policies, without having to pay an attorney to draft formal trusts for that purpose. Life insurance proceeds may be left to minor children under the Maryland Uniform Transfers to Minors Act (MUTMA) without setting up a formal trust. This may be done by simply designating the named child or children as death beneficiaries in the following manner: "Jane Thomas as custodian for my daughter Sarah Walker, under the terms of the Maryland Uniform Transfers to Minors Act" This is specifically set out in Maryland law in section 13-309(a)(3) of the Maryland Estates & Trusts Article. To leave life insurance proceeds to children in this manner may save money and provide more flexibility in case you change your mind as the years go by about who is to be the child's custodian. With a UTMA designation, all the parent need do is provide an amended death beneficiary designation to the insurance carrier -- as opposed to paying a lawyer to amend a trust and likely the "pour-over will" as well, to reflect the amendment to the trust. The primary benefit to setting up a formal trust for children's life insurance proceeds (assuming there are no estate tax avoidance reasons for doing so in your particular situation) is usually that the grantor of the trust (in this case, the living parent/owner of the life insurance policy) can set out particular trust terms that allow the money to be held in trust to any age of the child, beyond the 21 year old top age limit of MUTMA. However, under the Maryland version of the UTMA (MUTMA) statutes, this is unnecessary because the custodian for each child is permitted to place all the MUTMA funds in a formal trust he or she creates for the for the child when the child's 21st or 18th birthday is approaching --- if at that time significant funds are going to be left over when a child reaches the terminating age of 18 or 21. This future flexibility, written right into the Maryland MUTMA statute, makes it quite sensible to leave even larger amounts of money to children under a MUTMA death beneficiary designation, without fear that the trusted MUTMA custodian will simply have to hand over a large sum of cash to the child at age 21. However, in order to preserve this right of your named MUTMA custodian to create a formal trust for your minor child after you die, your death beneficiary designation form should include this specific language as supplied by the section 13-314 of the MUTMA: "I, [name of insured or owner of policy], elect to grant the custodian the authority to transfer all or part of the custodial property to a qualified minor's trust without a court order." There is no maximum dollar limit on the amount of life insurance proceeds that may be given to a minor child by way of death beneficiary designation under MUTMA. Leaving life insurance proceeds for your child under MUTMA eliminates the parent's need to set up a trust for the child in the first instance. Very often the existence of a trust creates unwanted management difficulty and expense for the trust beneficiary and for the trustee. These difficulties for trustees and trust beneficiaries include that a trust must file its own annual income tax return, at tax rates that are usually higher than individual income tax rates. When a parent does not know in advance how much money will be left in each child's share of life insurance proceeds as the child turns 18 or 21, the parent may be making the best estate planning decision for her minor child or children by designating a UTMA custodian to receive the child's share of her life insurance proceeds -- rather than setting up a trust for that purpose. The terms of MUTMA are effectively trust terms, but with the force ane effect of Maryland law, supplied by the statute and binding on all MUTMA custodians. Any bank or other financial institution that sets up and administers a MUTMA account for a minor knows these statutorily mandated trust terms and will be sure to provide the MUTMA custodian with a copy of the statutory "rules" or trust terms that will govern the custodian's management and use of the child's funds. These include (but are not limited to): o that the money belongs at all times irrevocably to the child beneficiary; Section 13-312 of MUTMA prescribes the " Duties and powers of custodian" as follow: (a) Control and management.- A custodian shall: (1) Take control of custodial property; (2) Register or record title to custodial property if appropriate; and (3) Collect, hold, manage, invest, and reinvest custodial property. (b) Standard of care.- (1) Except as provided in paragraph (2) of this subsection, in dealing with custodial property: (i) A custodian shall observe the standard of care that would be observed by a prudent person dealing with property of another and is not limited by any other statute restricting investments by fiduciaries; (ii) If a custodian has a special skill or expertise or is named custodian on the basis of representations of a special skill or expertise, the custodian shall use that skill or expertise; and (iii) A custodian, in the custodian's discretion and without liability to the minor or the minor's estate, may retain any custodial property received from a transferor. (2) A fiduciary subject to Sec. 15-114 of this article [a trust company or investment advisor] shall comply with that section in dealing with custodial property. (c) Life insurance investments.- A custodian may invest in or pay premiums on life insurance or endowment policies on: (1) The life of the minor only if the minor or the minor's estate is the sole beneficiary; or (2) The life of another person in whom the minor has an insurable interest only to the extent that the minor, the minor's estate, or the custodian in the capacity of custodian, is the irrevocable beneficiary. (d) Property to be kept separate.- (1) A custodian at all times shall keep custodial property separate and distinct from all other property in a manner sufficient to identify it clearly as custodial property of the minor. (2) Custodial property consisting of an undivided interest is so identified if the minor's interest is held as a tenant in common and is fixed. (3) Custodial property subject to recordation is so identified if it is recorded, and custodial property subject to registration is so identified if it is either registered, or held in an account designated, in the name of the custodian, followed in substance by the words: "As a custodian for ______________ (name of minor) under the Maryland Uniform Transfers to Minors Act". (e) Records.- A custodian shall keep records of all transactions with respect to custodial property, including information necessary for the preparation of the minor's tax returns, and shall make them available for inspection at reasonable intervals by a parent or legal representative of the minor or by the minor if the minor has attained the age of 14 years. MD Code Est. & Trusts, section 13-314, entitled "Delivery or payment to minor or for minor's use and benefit" provides: (a) In general.- A custodian may deliver or pay to the minor or expend for the minor's benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to: (1) The duty or ability of the custodian personally or of any other person to support the minor; or (2) Any other income or property of the minor which may be applicable or available for that purpose. (b) Transfer.- (1) Subject to paragraphs (3) and (4) of this subsection, a custodian may transfer all or part of the custodial property to a qualified minor's trust without a court order. (2) A transfer of custodial property to a qualified minor's trust terminates the custodianship of that property to the extent of the transfer. (3) Custodial property created under a testamentary instrument may not be transferred under this subsection unless the transfer is expressly authorized by the instrument. (4) For an inter vivos transfer under this subsection to be valid, the instrument that created the custodial property shall contain in conspicuous type a statement that the transferor of the property elects to grant the custodian the authority to transfer all or part of the custodial property to a qualified minor's trust without a court order. (c) Expenditure of custodial property.- On petition of an interested person or the minor if the minor has attained the age of 14 years, the court may order the custodian to deliver or pay to the minor or expend for the minor's benefit so much of the custodial property as the court considers advisable for the use and benefit of the minor. (d) Obligation to support not affected.- A delivery, payment, or expenditure under this section is in addition to, not in substitution for, and does not affect any obligation of a person to support the minor.

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