Debtor Who Invades Child’s Minor Account Should Lose Asset Protection Benefits

Totten trusts and UTMA(“uniform gift to minors”) financial accounts have different consequences for asset protection  Totten trusts are not protected from creditors because the accounts could be revoked or invaded by the parent, whereas the UTMA accounts are 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 called me because he just wants to make sure that his increasingly angry creditors cannot get the UTMA account so he’ll be able to keep the house until he finds work.

I think this caller’s creditors have a good argument for garnishing this debtor’s UTMA account. 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 debtors want the 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.