In a precedential decision issued on March 16, a panel of the Superior Court offered a helpful analysis of how plans established under the Pennsylvania Uniform Transfer to Minors Act, (PaUTMA, formerly PaUGMA) differs from accounts established under Section 529 of the Internal Revenue Code. This is an area of importance because we are seeing clients conflate the two when they are legally different animals. In many cases, these accounts hold assets of significant value and sometimes in quite disparate amounts. The Opinion in Brooks v. Brooks, 2020 Pa. Super. 66 (3/16/20) offers a guide to the dos and don’ts of these accounts.
During their marriage, David and Gail Brooks funded seven PaUTMA accounts and three accounts under Section 529 intended to benefit their three children. When they formed their marital separation agreement in 2016, they did what we commonly see, one spouse “kept” the accounts, but under a written obligation to provide semi-annual statements and to maintain them in a “fiduciary capacity.” As often occurs, whether out of neglect or worse, the statements were not forthcoming so Gail sued her ex-husband to enforce her rights to the information. What she learned when the statements were produced was that David has used $38,000 from one child’s 529 account to fund another child’s college educational expenses. She filed a petition to correct that and to be substituted as the fiduciary. Allegheny County appointed a Master to take evidence and issue a report. That Report granted much of the relief she sought. David filed exceptions and the supervising Judge vacated the recommendation and dismissed the petition. From that Order Gail appealed, yielding this decision.
The starting point of Judge Bowes decision is to draw the legal distinction between the two kinds of accounts. Uniform Gift/Transfer accounts are a statutory creature of Pennsylvania law and involve an irrevocable gift, which is complete when made, but affords the appointed guardian certain powers to employ the funds for the benefit of the child during his/her minority and up to age 21. Again, while this money can be spent for purposes benefiting the child beneficiary it is not subject to any form of claw back by the donor or reallocation to other beneficiaries.
Section 529 is quite different. This is actually an account that remains the property of the person who established it. The donor can claw back the money. However, in doing so, the funds become subject to federal income taxes. The funds can also be transferred from one designated beneficiary to another as happened in the Brooks case. This may or may not have been the intention of the parties when they employed the word “fiduciary” in describing how David Brooks was to operate the 529 Plans. Gail argued that the employment of that term in the property settlement agreement effectively converted the 529 plans into PaUTMA accounts. The Superior Court found no authority for that conclusion and decided not to adopt it as law. Specifically, the Court found that even though Section 529 of the Tax Code states that funds contributed to such an account are “treated” as irrevocable gifts for federal income tax purposes that does not make them irrevocable gifts as a matter of state law. The Opinion references IRS Publication 970 in support of this. Thus, David Brooks acted within his powers when he used money from a 529 account of one child to fund the college costs of another child. The Trial Court Opinion references an explicit right to transfer 529 funds between accounts, although the express language in the marital agreement conferring that right is not quoted.
The transfer and use of 529 funds, even without express authority from the other spouse, was found to be in conformity with the property settlement agreement. Therefore, the trial court properly dismissed the petition and the resulting Master’s recommendation. The Superior Court noted that this appeared to be a case of first impression and that a different result might have been obtained had David been made a “trustee” of these funds rather than a “fiduciary.”
The takeaway from this case is that language matters, and that if the funds held in 529 Plan are substantial or disparate, some attention should be devoted to rights and management responsibilities beyond precatory language involving “good faith.”
Clients tend to conflate these two forms of accounts because they seem quite similar. Counsel should also be aware that a 529 Plan could be a PaUTMA wherein the gift is irrevocable. Last, but not least, attention should be drawn to the fact that the various investment firms that offer these plans often do so with choice of law provisions. Thus, Californian law may govern a Bank of America 529 Plan, where a Wachovia Plan may be the creature of North Carolina law. Rarely do the firms sponsoring these plans devote any effort to explaining that these choices of law provisions may affect how the nominal owner manages the plans.