Working with your minor child to open a savings account and manage his or her money is a good thing, but what happens to that account if you ever have to file bankruptcy? The good news is that your child's account is probably exempt and can't be seized by the bankruptcy trustee to pay off debts. As with anything related to bankruptcy, the details do matter, though, so it's important to consult with your bankruptcy attorney to understand if your child's accounts are safe.
Usually, the court exempts custodial accounts that you hold on your child's behalf as well as 529 college savings accounts. However, if there is any indication that you used these accounts to shelter assets from a bankruptcy case, they might no longer be protected.
The courts usually look at when and how much money was deposited into such an account to determine whether these assets are protected from the bankruptcy. First, any amount of money deposited more than 720 days before the bankruptcy was filed is exempt. Certain amounts of money deposited between 365 and 720 days are usually protected, but money deposited in the year before the bankruptcy filing might not be protected.
The court isn't looking to take your child's income or money that was given to your child by others, so it's a good idea to keep records of such things. If you can show that your child received the money through his or her own work or as a gift from someone else, it will probably be protected. Before and during the bankruptcy process, it's important to disclose all this type of information to your lawyer.
Source: My Horizon, "How Does Bankruptcy Affect My Children," Bethany Lape, accessed Aug. 26, 2016