By Kitty J. Lin
Most parents want to be able to provide for their children’s financial future. What happens when you personally file for bankruptcy and have bank accounts in your children’s names? Is the money set aside for your children in danger of being taken by the trustee assigned to your bankruptcy case? The answer is “it depends” upon the type of the account and its purpose. You should speak with your bankruptcy attorney when you are filing for bankruptcy to see how different accounts may affect your bankruptcy estate and how it may affect your children’s accounts.
Bank Accounts in Childs Name
If you open a bank account that is a standard checking or savings account in your child’s name you will have to be an account holder too since the child is not 18 years old yet. Money deposited in these accounts will be considered an asset of your bankruptcy estate if you file for bankruptcy protection.
Once funds are transferred to an UTMA account, the funds are out of your name and belong solely to the child listed as the beneficiary. Since your children are minors and cannot have an account in their name, your name will most likely be listed as the custodian for your children in the account. This does not make the account yours. In fact, the transfers into an UTMA account are irrevocable in nature and cannot be transferred back. The money can be spent for the benefit of your children however. You cannot use the funds in the UTMA account for regular parental obligation expenses, such as food, housing, clothing. You can use the funds for your children such as for their education or educational tools like laptops or computers. UTMA accounts are considered to be an asset for your children so if they are applying for financial aid that needs to be taken into consideration. So what does this mean if you have to file for bankruptcy? Since the UTMA account is not an asset of yours it is not listed in your bankruptcy petition. There may be some issues with the UTMA account if it is determined that the reason you transferred the funds from your account to the UTMA account is to deprive your creditors of those funds. If that is found to be the case the transfers could be voided as a fraudulent transaction and brought back into your bankruptcy estate.
A 529 plan is a college savings plan that allows parents to contribute funds into the account for their children’s educational needs. It is a tax deferred plan and if the account is actually used for educational purposes it is actually tax free. A 529 plan is an asset that usually belongs to the parents. Therefore if the parents file for bankruptcy it is considered an asset of the parents. The funds that have been contributed to the 529 plan more than 2 years ago are protected from creditors in bankruptcy. If the funds were contributed between 1 to 2 years ago, the 529 plan is protected up to $5,000 per beneficiary. If the funds were contributed to the 529 plan less than a year ago it is not protected and is considered an asset of the bankruptcy estate unless you have available exemptions to protect that asset.
It is highly recommended that you tell your bankruptcy lawyer the specifics of the account so they can help you determine how to best protect the account if possible. You should not keep it from them because you think you know that it is not an asset of the bankruptcy estate. Let them determine that for themselves.