In this article we will explain everything you need to know about Illinois custodianships and the Illinois Uniform Transfers to Minors Act.
The Illinois Uniform Transfer to Minors Act (760 ILCS 20, et. seq.) allows one to transfer property to a minor, subject to the management of a custodian. A custodianship in Illinois is a relationship whereby an adult is given the power to manage a particular piece of property on behalf of a minor until the minor reaches age 21. The transfer is an irrevocable gift, and the minor receives legal title to the custodial property. The minor’s guardian will have no authority with respect to the property.
The appointed custodian may be the transferor, another adult or a trust company.
The method of transferring property to a custodianship varies based on the type of property. It must be recorded or registered wherever transfers of that property type are documented. Typically, the transfer is made by the same method as any other transfer of that type of property, except that the document conveying the property must transfer the property to the custodian “as custodian for [the name of the minor] under the Illinois Uniform Transfers to Minors Act.” In addition, transfers of real estate require some additional language whereby the custodian signs to accept the transfer.
The custodian is responsible for managing, investing, and reinvesting the property, and must act with regard to investments as would “a prudent person of discretion and intelligence who is seeking a reasonable income and the preservation of his capital.” A custodian who does not take a fee for its services is only liable for losses from bad faith, gross negligence, or failure to invest according to the “prudent person” standard.
In addition to the power to invest the property as the custodian finds prudent, the custodian may transfer the property to the minor or make payments for the benefit of the minor as the custodian sees fit. The custodian may also establish a trust for the benefit of the minor.
A guardianship is overseen by the court and subject to stricter oversight and limitations than a custodianship. The responsibilities of a guardian for the well-being of the minor are also typically broader than those of a custodian, who may only be responsible for management of one piece of property.
Because the minor is the owner of the property in a custodianship, the minor is taxed on the income on the property whether or not the property is distributed to him or her. The exception is when the income on the custodial property is used to satisfy a parent’s child support obligation, in which case the income would be taxable to the parent.
If the donor of the custodial property is also the custodian, the custodial property will be subject to estate tax in the donor’s estate. Generally, custodial property is subject to estate tax on the minor’s estate at the death of the minor.
In Illinois, a custodial estate is terminated and the property will transfer to the minor or his or her estate when the minor turns either 18 or 21 depending on how the property was conveyed to the custodial estate, or when the minor passes away.
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