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Are Custodial Accounts in Your Child’s Name Protected from Your Bankruptcy?

This personal bankruptcy question was posted on the internet in a bankruptcy discussion: “Are assets in your child’s name like custodial accounts and 529 plans protected if you have to file bankruptcy?”

Depending on what state you live, who funded the custodial accounts, and the length of time the custodial accounts have been in place will determine how bankruptcy courts will approach and handle the accounts.

Most custodial accounts are handled by state and federal exemption laws when it comes to filing bankruptcy. On the other hand, most bankruptcy courts will take into consideration who funded the custodial account if the exemptions are not enough to cover the accounts.

For instance, if a grandparent funds a custodial account for their grandchild’s future and the parent’s name is on the account for custodial reasons, the filing debtor needs only to prove this to the court and most bankruptcy courts will not pursue the funds to satisfy the needs of the bankruptcy filed.

When will Bankruptcy Trustees pursue custodial accounts?

If the debtor funded the account, bankruptcy trustees might pursue the funds. It all depends on how long the funds have been in the account and if the trustee believes the child is the actual owner of the funds. What a bankruptcy trustee might not want to do with such accounts is to give any type of impression a parent could place money into custodial accounts to hide non-exempt money from being used to pay creditors in a bankruptcy. If a filing debtor intentionally does this, the act could be construed to be fraud, and bankruptcy fraud is a punishable crime. Custodial accounts are a very sticky area for both the bankruptcy courts and the filing debtor.

A 529 plan is a college savings plan that allows individuals to save and invest on a tax-advantaged basis in order to fund future college expenses for a child. An Education Savings Account (ESA) is another tax-deferred plan you can use in order to fund future college expenses for your child. Depending on the state in which you declare bankruptcy and the state in which a 529 or ESA is created, most 529s and ESA plans are completely protected from bankruptcy with certain provisions.

If the creation date of the college plan was created more than 720 days before filing, the account is fully protected from bankruptcy. If the creation date of the college plan was between 365-720 days before filing, the account is protected up to $5000 per beneficiary. Plans created less than 365 days ago are not protected from bankruptcy unless a state exemption covers the amount.

Bankruptcy laws can be complicated, and common sense indicates you might need a bankruptcy lawyer in order to help you understand how these complex laws may apply in your particular situation.

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