The Prudent Person Standard
A UTMA custodian is not just holding assets in a drawer. Arizona requires the custodian to collect, hold, manage, invest, and reinvest custodial property for the benefit of the minor. The standard is the same care a prudent person would use when dealing with someone else's property. That means thoughtful decision-making, not reckless speculation.
In dealing with custodial property, 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.
A.R.S. § 14-7662(B)One important detail: a custodian who has special financial skills or was chosen because of their expertise is held to a higher standard. They must actually use that expertise. At the same time, a custodian can choose to keep property exactly as it was received from the transferor without any liability for that decision.
Keeping Property Separate and Records Clear
Mixing custodial property with personal assets is not allowed. Arizona requires the custodian to keep the minor's property clearly identifiable and distinct from everything else. Securities can be held in street name at a brokerage, but the custodial designation must stay in place. Real property must be recorded with the proper UTMA language.
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.
A.R.S. § 14-7662(D)Record-keeping is equally important. The custodian must maintain records of every transaction. This includes the information needed to prepare the minor's tax returns. A parent, legal representative, or any minor who is at least fourteen can request to inspect those records at reasonable intervals. This transparency protects everyone involved.
What Happens as the Minor Reaches the Age of Majority
Many families wonder about the custodian's duties as the minor reaches age 21, which is the age of majority for UTMA custodial accounts in Arizona. At that point, the custodian must transfer all remaining property to the former minor. Until then, any income earned in custodial accounts may be taxed at the child's tax rate. The custodian should keep records that support accurate income tax reporting each year.
Under the Minors Act (UTMA), the custodian's responsibility does not end with making good investment choices. It also includes following through on these record-keeping and separation duties. Families often find that selecting a custodian with strong organizational skills is just as important as choosing someone with financial knowledge.