Using UTMA Account As Loan Collateral

Question:

Under UTMA regulations it was my understanding that in order to use a UTMA account as collateral for a loan we needed some sort of proof that this money was to be used to benefit the minor. Is this correct? If so, how can we be sure that the loan proceeds are being used for the minor?

Answer:

Take a look at your state's version of the UTMA, particularly the powers of the custodian. In the model version the custodian does not have the power to pledge the assets as collateral. If the statute does not give them the power, they cannot do it regardless of the loan's purpose.

As a fiduciary, a custodian has what is called "naked possession." Translated, that means they have possession of the assets, but no power. If you take a security interest in a UTMA, you have an unsecured loan.

First published on BankersOnline.com 08/4/03