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A parent or grandparent who buys an annuity or life insurance policy to fund a child’s or grandchild’s college education (1) may own the policy, (2) may have a trust own the policy, or (3) may have a custodian own the policy under a state’s gifts to minors (UGMA) or transfers to minors (UTMA) Act.

A parent or other donor often elects to use a custodian. A custodianship avoids the legal and administrative fees of a trust. Furthermore, if an annuity is purchased by a custodian, the 10% tax on the pre-age 59-½ distributions of credited interest will affect the child less than a higher bracket parent not yet age 59-½.

Gifts in custodianship to children are made under state statutes. A few states continue to use the UGMA statute; other states have adopted, in whole or in part, the UTMA statute. The latter law expanded the methods of transferring assets to a minor.


A custodianship does not create a separate legal entity. Property transferred to the custodian remains the property of the minor and, generally, the minor is liable for any tax on the income. The minor’s social security number is listed on the insurance company’s records for income tax purposes. However, the custodian administers the property during the custodial period.

If the custodian uses custodial income to discharge the legal obligation of any person to support the minor, such income is taxable to the person with the support obligation. Thus, the parent will be taxed with the income if the custodian uses the fund to pay the minor’s college expenses and the parent has the support obligation under state law (Rev.Rul.59-357, 1959-2 CB 212). So, in many states the custodianship should end before the income is used for college expenses.

The donor should not name herself as custodian if her estate is of such size to attract federal estate tax at death. Should the donor die before the custodianship ends, the custodial property will be included in his estate as a transfer with power to amend or revoke [IRC Sec.2038(a)(1)].

Termination of Custodianship

The custodianship ends at the earlier of (a) the minor’s death, or (b) upon the minor reaching the age specified in the controlling statute. Termination occurs at the minor’s reaching age 18 in all UGMA states.

The standard UTMA text has been adopted by a number of the UTMA states. The custodianship terminates at age 21 in these states and at age 18 in other UTMA states. Some states permit the donor to specify the termination date at time of transfer (gift). The maximum age is 21 if the custodial gift is to qualify for the $10,000 annual exclusion which is available only for gifts of a present interest.

Owner-Beneficiary Designations

If a life insurance or annuity policy is purchased by, or transferred to an UGMA or UTMA account, the ownership blank could be completed as follows: “Emily Dickinson, custodian for Tommy Jones under the [state of minor’s residence] [Transfers or Gifts] to Minors Act.” The beneficiary is the “Estate of Tommy Jones.”

It may be desirable to name a successor custodian at the time the custodianship is established, to anticipate the custodian becoming unable to serve. The ownership blank could read: “Emily Dickinson as custodian, or Charlotte Bronte as successor custodian, for Tommy Jones under (for example) the Alabama Uniform Transfers to Minors Act.”

Minor As Life Policy Beneficiary

Sometimes, your clients wish to name minor children as beneficiaries of their life insurance. An insurance company will not pay a death benefit directly to a minor because of the risk of double liability.

The policyowner could name a guardian for this benefit in his or her own will. Absent such will provision, the probate or county court must appoint a guardian of the minor’s property before the insurance company will pay the death benefit.

As an alternative, the policyowner may anticipate in the beneficiary designation his or her death before the minor becomes an adult. The beneficiary designation, for example, may read as follows: “Jane Thompson, wife of insured, if living, otherwise to Keith and Susan Thompson, children of the insured, equally or to the survivor, provided that if any proceeds become payable to a beneficiary who is a minor as defined in the Alabama Uniform Transfers to Minors Act, such proceeds shall be paid to Mary Crawford as custodian for such beneficiary under the Alabama Act.”

Some policyowners do nothing more than name a minor child as beneficiary. If the insurance company has its home office in an UTMA state and state law permits, it may pay the proceeds to a parent of the child or to a trust company as custodian for the minor. This distribution is known as a no-nomination transfer. The amount payable under this method, however, is limited to $10,000 in most UTMA states.

Printed with the permission of Advanced Underwriting Consultants

Last Updated: 12/15/2002 11:45:00 AM