Custodial accounts are a frequent issue bankruptcy law centers handle. Custodial accounts are funds in which one person sets up an account, funds it with money or other property, and controls the account for the benefit of another person. Parents often set up custodial accounts for their minor children. While the custodian controls the account, he or she does not have legal ownership to the property.The Bankruptcy Code states in section 541(b)(1) that property of the estate does not include any power that the debtor may exercise solely for the benefit of an entity other than the debtor. Thus, it would seem that a custodial account would not be included as an asset in a person's bankruptcy.
Unfortunately, as in many cases in law, the issue is not quite that clear. Many people that establish custodial accounts use the account inconsistent with its purpose: i.e., they use it as if the property being held was their own, rather than the beneficiary's. Examples of inconsistent use include situations where the property (usually money in a bank account) may be used to pay the custodian's personal expenses, deposits may made for the purpose of escaping creditors, property may be placed in the custodial account that isn't truly intended for the use of the beneficiary. Simply, the custodial account may be used as the custodian's own personal piggy bank.
If it is found than the custodial account is used improperly, the protection the assets within the account had possessed from the custodian's creditors (including a bankruptcy trustee) may be lost.
Custodial Accounts Must Be Disclosed To Bankruptcy Trustee
Practically speaking, if there isn't much value to the property held in a custodial account, a trustee is not likely to attempt to attach the property. Nonetheless, a person's interest in a custodial account must me disclosed and the history of transfers discussed with experienced bankruptcy counsel prior to filing for bankruptcy protection.
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