Custodial Accounts May Not Be Protected
A custodial account is an account established at a bank or other financial institution that is for the benefit of a minor but under the control of an adult. For example, you could set up a custodial savings account for your child; any withdrawals will then require your approval. For that reason custodial accounts are great ways to help your children save and to learn about managing money while allowing you to maintain overall control.
That’s a great reason to use custodial accounts, but they do come with risks. For example, custodial accounts are usually not considered to be protected assets if you file for bankruptcy even if the money in the account is truly your child’s. Say your parents give your son a large amount of cash that is deposited in the custodial account; if you declare bankruptcy the court could possibly pursue that money to repay debts you owe. In general, custodial accounts make great sense for small sums of money; if your child has significant assets you may want to consider another option.