BILL ANALYSIS H.B. 2268 By: Hilbert 03-27-95 Committee Report (Amended) BACKGROUND For many years, Texas law has included the Texas Uniform Gift to Minors Act ("TUGMA"), which provides for custodianships of minors which terminate at age 18. While TUGMA has been amended over the years to modernize it and to give it greater flexibility, it is still somewhat antiquated. Most states have now adopted the Uniform Transfers to Minors act ("UTMA"). UTMA provides greater flexibility, and extends custodianships to age 21. PURPOSE H.B. 2268 updates Texas statutes dealing with transfers to minors from estates or through gifts. The bill also extends the term of the custodianship to age 21, when the child is better able to deal with the assets. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Chapter 141, Property Code, as follows: Sect. 1. TITLE. Texas Uniform Transfers to Minors Act (Texas UTMA). Sect. 2. DEFINITIONS. (1) Adult means an individual who is at least 21 years of age. (2) Benefit plan means an employer's plan for the benefit of an employee or partner or an individual retirement account. (3) Broker means someone who lawfully handles securities and commodities transactions for the person's own or another account. (4) Court means a court with original probate jurisdiction. (5) Custodial property means: (A) Any interest in property transferred to a custodian under this chapter; and (B) the income from and proceeds of that interest in property. (6) Custodian means a person designated under Sect. 10 or a successor or substitute under Sect. 19. (7) Financial institution means a state- or federally-chartered and supervised bank, trust company, savings institution, or credit union. (8) Guardian means a person appointed or qualified by a court to act as general, limited, or temporary guardian of a minor's property or a person legally authorized to perform substantially the same function. (9) Legal representative means an executor, independent executor, administrator or independent administrator of a decedent's estate, an obligor under a benefit plan or other governing instrument, a successor legal representative, or a person legally authorized to perform substantially the same functions. (10) Member of the minor's family means the minor's parent, stepparent, spouse, grandparent, sibling, uncle, or aunt, whether of whole or half blood or by adoption. (11) Minor means a person younger than 21 years of age. (12) Transfer means a transaction that creates custodial property under Sect. 10. (13) Transferor means a person who makes a transfer under this chapter. (14) Trust company means a financial institution, corporation, or other legal entity authorized to exercise general trust powers. Sect. 3. SCOPE AND JURISDICTION. (a) Applies to a transfer that refers to the Texas UTMA in the designation under Sect. 10(a) by which the transfer is made if at the time of the transfer, the transferor, the minor or the custodian is a resident of Texas or the custodial property is located in Texas. Even if any of them move out of state or take the custodial property out of state, this chapter still applies. (b) A person designated as a custodian under this chapter is subject to personal jurisdiction in Texas with respect to any matter relating to the custodianship. (c) A transfer that purports to be made and that is valid under UTMA, the UGMA or a substantially similar act of another state is governed by the law of the designated state and may be executed and is enforceable in Texas, if at the time of the transfer, the transferor, the minor, or the custodian is a resident of the designated state or the custodial property is located in the designated state. Sect. 4. NOMINATION OF CUSTODIAN. (a) A custodian may be revocably nominated by a person having the right to designate the recipient of property transferable on the occurrence of a future event. The nomination must, in substance, include the following: "as custodian for (name of minor) under the Texas UTMA." One or more substitute custodians, who would act if the first nominee dies before the transfer or is unable, declines or is ineligible to serve, can be nominated, too. The nomination may be made in a will, a trust, a deed, an instrument exercising a power of appointment, or in a writing designating a beneficiary of contractual rights that is registered with or delivered to the payor, issuer, or other obligor of the contractual rights. (b) A custodian nominated under this section must be a person to whom a transfer of property of that kind may be made under Sect. 10(a). (c) The nomination of a custodian does not create custodial property until the nominating instrument becomes irrevocable or a transfer to the nominated custodian is completed under Sect. 10. Unless revoked, the custodian becomes effective on the occurrence of the future event, and the custodian shall enforce a transfer of the custodial property under Sect. 10. Sect. 5. TRANSFER BY GIFT OR EXERCISE OF POWER OF APPOINTMENT. Provides that a transfer to a custodian may be made by gift or irrevocable exercise of a power of appointment. Sect. 6. TRANSFER AUTHORIZED BY WILL OR TRUST. (a) Provides for a transfer by a legal representative or trustee to a person named in the governing instrument. (b) If the testator or settlor has nominated a custodian, the transfer must be made to that person. (c) If the testator or settlor has nominated a custodian, or all persons nominated as custodian dies before the transfer or are unable, decline or are ineligible to serve, the legal representative or the trustee shall designate the custodian from among those person eligible to serve as custodian for property of that kind under Sect. 10(a). Sect. 7. OTHER TRANSFERS BY FIDUCIARY. (a) A legal representative or trustee may make an irrevocable transfer to another adult or trust company as custodian for a minor's benefit under Sect. 10 in the absence of a will or under a will or trust that does not contain an authorization to do so. (b) With the approval of the court supervising the guardianship, a guardian may make an irrevocable transfer to another adult or trust company as custodian for a minor's benefit under Sect. 10. (c) A transfer under (a) and (b) may be made only if: (1) the legal representative, or trustee considers the transfer to be in the best interest of the minor; (2) the transfer is not prohibited by or inconsistent with provisions of the applicable will, trustee agreement, or other governing instrument; and (3) the transfer is authorized by the court if it exceeds $10,000 in value. Sect. 8. TRANSFER BY OBLIGOR. (a) Subject to (b) and (c), a person who is not subject to Sect. 6 and 7 and who holds property of or owes a liquidated debt to a minor who does not have a guardian may make an irrevocable transfer to a custodian for the benefit of the minor under Sect. 10. (b) If a person who has the right to nominate a custodian has nominated one to receive the custodial property, the transfer must be made to that person. (c) If a custodian has not been nominated or all persons nominated as custodians die before the transfer or are unable, decline or ineligible to serve, a transfer may be made to an adult member of the minor's family or to a trust company unless the property exceeds $10,000 in value. Sect. 9. Provides that the custodian' receipt is a sufficient discharge. Sect. 10. MANNER OF CREATING CUSTODIAL PROPERTY AND EFFECTING TRANSFER; DESIGNATION OF INITIAL CUSTODIAN; CONTROL. (a) Custodial property is created and a transfer is made when: (1) an uncertificated or certificated security in registered form is: (A) registered in the name of the transferor, another adult, or a trust company, followed in substance by the words: "as custodian for (name of minor) under the Texas UTMA"; or (B) delivered if in certificated form, or any document necessary for the transfer of an uncertificated security is delivered, with any necessary endorsement to another adult or to a trust company as custodian, accompanied by an instrument in substantially the form set forth in (b); (2) money is paid or delivered, or a security held in the name of a broker, financial institution, or its nominee is transferred, to a broker of financial institution for credit to an account in the name of the transferor, another adult, or a trust company, followed in substance by the words: "as custodian for (name of minor) under the Texas UTMA"; (3) the ownership of a life or endowment insurance policy or annuity contract is: (A) registered with the issuer in the name of the transferor, another adult, or a trust company, followed in substance by the words: "as custodian for (name of minor) under the Texas UTMA"; or (B) assigned in a writing delivered to another adult or to a trust company whose name in the assignment is followed in substance by the words: "as custodian for (name of minor) under the Texas UTMA"; (4) an irrevocable exercise of power of appointment or an irrevocable present right to future payment under a contract is the subject of a written notification delivered to the payor, issuer, or other obligor that the right is transferred to the transferor, another adult, or a trust company, whose name in the notification is followed in substance by the words: as custodian for (name of minor) under the Texas UTMA." (5) an interest in real property is conveyed by instrument recorded in the real property records in the county in which the real property is located to the transferor, another adult other than the transferor, or a trust company, followed in substance by the words: "as custodian for (name of minor) under the Texas UTMA." (6) a certificate of title issued by a department or agency of a state or of the U.S. that evidences title to tangible personal property is: (A) issued in the name of the transferor, another adult, or a trust company, endorsed to that person followed in substance by the words: "as a custodian for (name of minor) under the Texas UTMA"; or (B) delivered to another adult or to a trust company, endorsed to that person followed in substance by the words: "as custodian for (name of minor) under the Texas UTMA"; or (7) an interest in any property not described in Subdivisions (1)-(6) is transferred to another adult or to a trust company by a written instrument in substantially the form set forth in Subsection (b). (b) Specifies the form that will satisfy the requirements of Subsection (a)(1)(B) and (7): (c) A transferor shall place the custodian in control of the custodial property as soon as practicable. Sect. 11. SINGLE CUSTODIANSHIP. Provides that each transfer must be made for only one minor and that one person may be custodian. Sect. 12. VALIDITY AND EFFECT OF TRANSFER. (a) The validity of a transfer made in a manner prescribed by this chapter is not affected by the: (1) transferor's failure to comply with Sect. 10(c) concerning possession and control; (2) designation of an ineligible custodian, except designation of the transferor in the case of property for which the transferor is ineligible to serve or (3) death or incapacity of a nominee or designee or the disclaimer of the office by that person. (b) A transfer made under Sect. 10 is irrevocable, and the custodial property is indefeasibly vested in the minor. Gives the custodian the rights, powers, duties, and authority with respect to custodial property over the minor or the minor's legal representative. (c) By making a transfer, the transferor incorporates all the provisions of this chapter in the disposition and grants to the custodian, or to any third person dealing with a person designated as custodian, the respective powers, rights and immunities provided by this chapter. Sect. 13. (a) A custodian shall: (1) take control of custodial property; (2) register or record tile to custodial property if appropriate; and (3) collect, hold, manage, sell, convey, invest, and reinvest custodial property. (b) The custodian in dealing with custodial property, shall act as a prudent person would deal with property of another. The custodian shall utilize any special skill or expertise they may have. The custodian, using discretion and without liability, may retain any custodial property received from a transferor. (c) A custodian may invest in or pay premiums on life insurance or endowment policies on the life of: (1) the minor only if the minor or the minor's estate is the sole beneficiary; or (2) another person in whom the minor has an insurable interest only to the extent that the minor, the minor's estate, or the custodian in the capacity of the custodian is the irrevocable beneficiary. (d) A custodian at all times shall keep custodial property separate and distance from all other property in a manner sufficient to identify it clearly as custodial property of the minor. Custodial property consisting of an undivided interest and custodial property subject to recordation are required to be identified as such. (e) Records of all custodial property transactions are to be kept, including information to prepare the minor's tax returns, and make those records available for inspection by a parent or legal representative of the minor. Sect. 14. POWERS OF CUSTODIAN. (a) A custodian, acting in a custodial capacity, has the same rights that unmarried adult owners have over their own property, but the custodian can only use that authority in their capacity as a custodian. (b) A custodian is not relieved from liability for breach of Sect. 13. Sect. 15. USE OF CUSTODIAL PROPERTY. (a) A custodian can use the minor's custodial property for the benefit of the minor as he or she considers advisable without court order and without regard to: (1) the duty or ability of the custodian personally or of any other person to support the minor; or (2) any other income or property of the may be applicable or available for that purpose. (b) An interested person or the minor may petition and the court may order the custodian to deliver or pay to the minor or expend for the minor's benefit as much of the custodial property as the court considers advisable for the use and benefit of the minor. (c) A delivery, payment, or expenditure under this section is in addition to, not in substitution for, and does not affect any obligation of a person to support the minor. Sect. 16. CUSTODIAN'S EXPENSES, COMPENSATION, AND BOND. Provides for reimbursement of expense, compensation for the custodian, and that no bond shall normally be required. Sect. 17. EXEMPTION OF THIRD PERSON FROM LIABILITY. Provides that third persons may deal with the custodian without liability. Sect. 18. LIABILITY TO THIRD PERSON. (a) A claim based on a contract entered into by a custodian acting in a custodial capacity, an obligation arising from owning or controlling custodial property, or a tort committed during the custodianship may be asserted against the custodial property by proceeding against the custodian in his official capacity, whether or not the custodian or the minor is personally liable for the claim. (b) A custodian is not personally liable: (1) on a contract properly entered into in the custodian's custodial capacity unless the custodian fails to reveal that capacity and to identify the custodianship in the contract; or (2) for an obligation arising from control of custodial property or for a tort committed during the custodianship unless the custodian is personally at fault. (c) A minor is not personally liable for an obligation arising from ownership of custodial property or for a tort committed during the custodianship unless the minor is personally at fault. Sect. 19. RENUNCIATION, RESIGNATION, DEATH, OR REMOVAL OF CUSTODIAN; DESIGNATION OF SUCCESSOR CUSTODIAN. (a) If a custodial nominee or designee wishes to decline to serve, they must deliver a written notice to the person who made the nomination or to the transferor's legal representative. A substitute nominee may be selected by the nominator; otherwise the transferor or the transferor's legal representative shall designate a substitute custodian. (b) A custodian at any time may designate as successor custodian a trust company or an another adult by executing and dating an instrument of designation before a subscribing witness other than the successor. In order for a successor to take over, the instrument must include the custodian's resignation. If not, the successor can't take over until the custodian resigns, dies, becomes incapacitated, or is removed. (c) A custodian may resign at any time by delivering: (1) written notice to the successor custodian and to the minor if the minor is at least 14 years of age; and (2) the custodial property to the successor custodian. (d) If a custodian is ineligible, dies or becomes incapacitated without designating a successor and the minor is at least 14 years old, the minor may designate as successor custodian an adult member of the minor's family, a guardian of the minor, or a trust company in the manner prescribed by Subsection (b). If the 14 or younger minor fails to act within 60 days after the ineligibility, death, or incapacity of the custodian, the minor's guardian becomes successor custodian. The court can be petitioned to designated a successor custodian if the minor has no guardian or the minor's guardian declines to act. (e) As soon as practicable, a custodian who declines to serve under Subsection (a) or resigns under Subsection (c), or the legal representative of a deceased or incapacitated custodian, shall put the custodial property and records in the possession and control of the successor custodian. (f) A transferor, the legal representative of a transferor, an adult member of the minor's family, a guardian of the person of the minor, the guardian of the minor, or the minor if the minor is at least 14 years of age may petition the court to: (1) remove the custodian for cause and designate a successor custodian other than a transferor under Sect. 5; or (2) require the custodian to give appropriate bond. Sect. 20. ACCOUNTING BY AND DETERMINATION OF LIABILITY. (a) The court may be petitioned for: (1) an accounting by the custodian or the custodian's legal representative; or (2) a determination of responsibility, as between the custodial property and the custodial personally, for claims against the custodial property unless the responsibility has been adjudicated in an action under Sect. 18 to which the minor or the minor's legal representative was a party. (b) A successor custodian may petition the court for an accounting by the predecessor custodian. (c) The court, in a proceeding under this chapter or in any other proceeding, may require or permit the custodian or the custodian's legal representative to account. (d) If a custodian is removed under Sect. 19(f), the court shall require an accounting and order delivery of the custodial property and records to the successor custodian and the execution of all instruments required for transfer of the custodial property. Sect. 21. TERMINATION OF CUSTODIANSHIP. The custodian shall transfer the custodial property to the minor or the minor's estate on the earlier of the date: (1) the minor attains 21 years of age, with respect to custodial property transferred under Sect. 5 or 6; (2) the minor attains the age of majority under the laws of this state other than this chapter, with respect to custodial property transferred under Sect. 7 or 8; or (3) the minor's death. Sect. 22. Makes the Act applicable to transfers after September 1, 1995, if: (1) the transfer purports to have been made under the Texas UTMA; or (2) the instrument by which the transfer purports to have been made uses in substance the designation "as custodian under the Uniform Gift to Minors Act" or "as custodian under the Uniform Transfer to Minor Act" of any other state, and the application of this chapter is necessary to validate the transfer. Sect. 23. EFFECT ON EXISTING CUSTODIANSHIPS. (a) Any transfer of custodial property under this chapter made before Sept. 1, 1995, is validated notwithstanding that there was no specific authority for the coverage of custodial property of that kind or for a transfer from that source at the time the transfer was made. (b) Sects. 2 and 21, with respect to the age of a minor for whom custodial property is held under this chapter, do not apply to custodial property held in a custodianship that terminated because the minor attained the age of 18 after Aug. 26, 1973, and before Sept. 1, 1995. Sect. 24. UNIFORMITY OF APPLICATION AND CONSTRUCTION. Provides that the Act is to be construed to effect its general purpose. Deletes entirely the Texas Uniform Gifts to Minors Act. SECTION 2. (a) Act takes effect Sept. 1, 1995, and applies to transfer made in a manner and form prescribed by Chapter 141, Property Code, as amended by this Act, on or after that date. (b) This Act applies to transfers made before the effective date of this Act in a manner and form prescribed by Chapter 141, Property Code, as amended by this Act, except to the extent that the application impairs constitutionally vested rights or extends the duration of custodianships in existence on the effective date of this Act. SECTION 3. Emergency clause. EXPLANATION OF AMENDMENTS The amendment to Section 10, Subsection 5, clarifies that the real property transfer is done by conveyance and not be recording. The amendment to Section 13, Subsection (a)(3) clarifies that the powers of the custodian includes the power to convey real property. The amendments to Section 2, Subsection (9); and Section 7, Subsections (a), (b) and (c)(1) clarifies that a guardian could not make gifts without the approval of the court supervising the guardianship. SUMMARY OF COMMITTEE ACTION House Bill 2268 was considered by the Committee on Civil Practices in a public hearing on March 29, 1995. The following individuals testified in support of the bill: Alvin J. Golden, representing the Texas Academy of Probate and Trust Lawyers. No one testified in opposition to or neutrally on the bill. The bill was left pending. House Bill 2268 was considered by the Committee on Civil Practices in a public hearing on April 12, 1995. The committee considered one amendment, which was adopted without objection. The bill was reported favorably as amended, with the recommendation that it do pass and be printed, by a record vote of six ayes, zero nays, zero pnv, and three absent.