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<p><strong>Carlson v. Wells, ____ S.E.2d _____, (2011).</strong></p>
<p style="text-align: justify;">Procedural History.  An action was brought on behalf of Eric Carlson, Scott Carlson and Ariel Carlson (the “Children”) against their father, Jon, and their uncle, James, as the custodians of the Children’s UTMA accounts.  The Children sought the removal of Jon and James (the “Custodians”) and requested an accounting, compensatory damages, attorney fees, and costs due to the transfer of funds to other accounts and use of funds for a speculative investment.  The Circuit Court for the City of Virginia Beach referred the case to a commissioner in chancery, who found that the Children had received a full accounting and that, despite having commingled UTMA funds with his own property, Jon had only breached his custodial duty to allow the Children to inspect the UTMA records.  James was found not to be in breach of any of his fiduciary duties.  The Children filed an exception to the commissioner’s report with the Circuit Court of the City of Virginia beach.  In review of this report, the circuit court found that the Custodians breached their duties to the Children, and awarded the Children compensatory damages, attorney fees, and costs. The Custodians appealed this decision to the Supreme Court if Virginia.</p>
<p style="text-align: justify;">Facts.  In December of 2003, Eric, one of the Children, requested the balance of his UTMA accounts in order to plan for the payment of his college education.  After being informed by his father that the money “might not be available,” Eric accessed his accounts and discovered that the funds had been withdrawn.  The Children then filed a complaint with the circuit court of Virginia Beach and received an accounting from the Custodians.  The accounting showed that most of the Children’s UTMA accounts were closed in 2002, and the funds were transferred to a single Bank of America savings account opened jointly in the names of the Children and Jon.  Jon made several withdrawals from the account, claiming that they were reimbursements for expenditures made by him on behalf of the Children.  Jon also transferred funds to his personal Vangaurd Health Care mutual fund and Fidelity Investments accounts, as well as using $40,000 to purchase U.S. Airways stock immediately before the company sought bankruptcy protection.</p>
<p style="text-align: justify;">Supreme Court’s Analysis.  The court applied the relevant standard of care for the time that the actions of the Custodians occurred, which stated “[i]n dealing with custodial property, a custodian shall observe the standard of care that would be observed by a prudent person dealing with such person’s own property and is not limited by any other statue restricting investments by fiduciaries.”  The court also referenced Colorado case law as guidance, finding that the Carlsons had a duty to preserve the principal of the UTMA funds and that Jon’s speculative investments in U.S. Airways stock violated that duty.  (Buder v. Sartore, 774 P.2d 1383 (Colo. 1989).)  Although Jon argued that, since he invested the UTMA money with his own money, he had to have met the foregoing standard of care, the court found that he failed to invest the UTMA assets with the view of preserving the estate.  The duty of fiduciaries with regard to the prudent person rule is evaluated with respect to each individual investment, rather than the performance of the portfolio as a whole.  Therefore, the Custodians were found to be liable to the Children in the amount of $40,000 for the U.S. Airways stock investment.</p>
<p style="text-align: justify;">Further, the Virginia Code requires the Custodians to keep records of all transactions with respect to custodial property.  Since Jon admitted to commingling the UTMA funds in the Bank of America account, and then transferring the funds to his own accounts, he has the burden of proving the amount of the commingled funds he personally owns.</p>
<p style="text-align: justify;">The Supreme Court held that (1) Jon breached the prudent investor rule for the standard of care for his investments in a company that was on the brink of bankruptcy; (2) both Custodians have the burden of proving each transfer from the UTMA funds was used properly; and (3) the Custodians must pay the children’s attorneys fees.</p>
<p style="text-align: justify;">Recommendations.  Although UTMA accounts are widely used, donors should understand the duties and requirements involved before opening an account on behalf of a minor and serving as custodian.  All funds in a UTMA account belong to the minor, and the custodian must take care not to commingle funds or withdraw amounts for personal use.  Also, the custodian must keep detailed and accurate records of all investments, deposits, payments and withdrawals.  Finally, upon attaining the age of majority, the minor must be given all amounts in the account, regardless of whether the amount is considered “too much” by a parent or guardian.  In order to retain added control over funds that are intended for a UTMA account, other methods, such as 529 plans or education trusts, may be preferred.</p>
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