Children’s Bank Accounts and 529 Savings Plans in Bankruptcy

      Debtors filing Massachusetts Chapter 7 and Chapter 13 bankruptcy cases are frequently concerned about their children’s bank accounts and 529 college education savings plans. The question is whether these assets must be listed in the parent’s bankruptcy filing.

For bank accounts, it depends on how the bank account was opened. If the bank account has only the debtor’s name on it there may be an issue as it would appear such an account is the debtor’s and not the child’s. It can be argued that account is held in trust for the benefit of the child, but the debtor will have to document and prove the monies are truly the child’s. An account set up under the Uniform Gift to Minors Act will mean the monies will not be part of the parent’s bankruptcy filing.

529 Education Accounts are not considered the property of the child. They belong to the individual who opened the account and is named on it. Notwithstanding, the entire balance may not be an asset of the bankruptcy estate. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 excludes from the bankruptcy estate funds contributed to a 529 savings account more than 720 days before filing the bankruptcy petition. Contributions made between 365 and 720 days before the bankruptcy filing are limited to an exclusion amount of $5,000. Amounts contributed to a 529 plan within 365 days before the bankruptcy is filed are not excluded from the debtor’s bankruptcy estate. In each instance, the amount considered is the contribution and not the account balance.

Finally, while anyone can contribute on behalf of a designated beneficiary, only amounts contributed to the accounts of a child, stepchild, grandchild, or step-grandchild of the debtor for the taxable year for which funds were placed in such account are excludable as described above.