Does Debtor Borrowing Money From Child’s UTMA Account Forfeit Protection In Chapter 7 Bankruptcy?

A few days ago I wrote a blog post comparing the asset protection of Totten trusts and UTMA(“uniform gift to minors”) financial accounts. I explained that the Totten trusts were not exempt from the bankruptcy estate because the accounts could be revoked or invaded by the parent, whereas the UTMA accounts were protected because deposits made to these accounts are legally irrevocable. The asset protection of the UTMA account presumes that the parent follows the law.A caller from Miami had read the UTMA blog posts and wanted to confirm the protected status of his child’s account. The story is told that a few years ago when the caller was “rich” he made a six figure deposit into his only child’s UTMA bank account. His intent was to set aside some money for his child’s college education. Then, the recession. The caller lost over a year ago. He spent his savings supporting his family. In his last effort to keep his house he began paying his mortgage from his child’s UTMA account. He wants to know whether a bankruptcy trustee could take his UTMA account in the event he files Chapter 7 bankruptcy because he wants to continue using the money to pay the house mortgage until he finds work.

I think a bankruptcy trustee would have a good argument to include debtor’s UTMA account in the non-exempt bankruptcy estate. The law protects UTMA accounts because this type of account is an irrevocable gift to a minor child. When this parent disregards the irrevocable nature of the account and treats the money as his personal savings account he is destroying the reason for the account’s protection. Debtors should not be allowed to asset protect their own savings and checking accounts just by bestowing them with a UTMA label.

If debtor’s want to protection benefits of a UTMA account they must follow the rules; once the parent gives the money to the child’s UTMA account the parent cannot get it back. If the parent does not follow that simple rule then they should forfeit the UTMA benefits and the protection in a bankruptcy proceeding.