Children’s Assets and Bankruptcy

As parents, it is our responsibility to think of the safety of our beloved children.  This responsibility covers not just their physical and psychological health but the financial prosperity of our children as well.  When money troubles effect the family one of the natural reactions is to want to protect any assets your child may have.  Let’s review what may happen to any savings accounts, 529 plans or trust accounts.

What happens when a parent files for Chapter 7 or 13 bankruptcy and has a bank account or college savings plan in the child’s name? Is the money set aside for your child/children in danger of being taken by the trustee assigned to your bankruptcy case? The answer is not a definitive one and should be discussed with your qualified bankruptcy attorney.

  • Bank Accounts – If your minor child has a bank account for savings or checking – called a UTMA account your name will need to be on the account also due to the child not being 18 years old yet.  As long as the only money that is deposited into such an account is the child’s money, and as long as the parent doesn’t use the money for his/her own purposes, the money will not be a part of the parent’s bankruptcy estate (it will be protected). An area where parents can get into trouble occurs when they transfer assets to their child prior to filing their bankruptcy case. The trustee assigned to the case will investigate any transfers of property to determine if the parents were attempting to protect their assets from being included in their bankruptcy. Discuss with your attorney the timing and reasons why transfers were made.
  • College Savings Plans such as a 529 Plan – 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.
  • Children’s Property – Even though you are required to list assets in the bankruptcy petition, when it comes to your children’s assets it may depend on what the asset is and the age of your children.  If you have minor children, it is likely any property they have would be owned by the parent, such as toys, furniture, and clothing. If your child paid for something with their own money it may not be considered your property. An example would be if you have a 16 year old who worked part-time and bought a used car. The car is not yours so the court will not be able to seize it.
  • Exemptions – There are legal ways to protect assets through state and federal exemptions.  If you have a trust fund or bank account these funds may be protected depending on how long they have been active and contributions made to them.

No comments yet.

Leave a Reply

Name (required)

Email (will not be published) (required)

Website