We recently had a question as to whether it is permissible to pledge funds in an UTMA account for a loan.
In a fiduciary relationship, a custodian only has possession of the asset but not otherwise — a custodian has possession but no power. The custodian has a fiduciary duty to only use the money in the child’s best interest (which cannot include things that are a parent’s responsibility to provide, even if necessary for the minor).
The Illinois Uniform Transfers to Minors Act states as follows:
14. Powers of Custodian. (a) A custodian, acting in a custodial capacity, has all the rights, powers, and authority over custodian property that unmarried adult owners have over their own property, but a custodian may exercise those rights, powers, and authority in that capacity only.
(760 ILCS 20/14(a)).
This means that the custodian can use the property s/he would use as her/his own property – as long as it is for the benefit of the minor. Pledging any of that property to secure a loan clearly for the minor’s benefit may be acceptable, but pledging for any other purpose would be a breach of the custodian’s duty. Furthermore, a lender accepting such a pledge would be on notice of a breach of fiduciary duty under Uniform Commercial Code Section 3-307, and could be liable to the minor for any losses.
Your account agreement should have language in it that an UTMA account cannot be pledged as collateral for any loan on behalf of the custodian.
By: Kari Osier, Compliance Specialist