Custodial savings accounts are controlled by an adult for the benefit of a minor. State laws dictate whether creditors may garnish custodial savings accounts based on how the account is set up and the source of the funds within the account. The two primary types of custodial accounts are UGMA — Uniform Gifts to Minors Act — and UTMA — Uniform Transfers to Minors Act. Both accounts are controlled by the custodian, but owned by the child.
Judgments
Judgments are awarded to creditors who win a lawsuit against consumers based on unpaid debt. Winning a judgment is the first step toward garnishing a checking or savings account owned by the consumer. Custodial savings accounts set up with a minor listed as the owner of the account are not subject to garnishment by creditors.
UGMA & UTMA
Minors cannot legally incur debt, eliminating the potential for creditors to win a judgment against them. UGMA custodial savings accounts may be subject to garnishment if the account is set up to withhold disbursements until the minor child is 21 years of age. Between the ages of 18 and 21, the owner of the custodial account may open a credit card or other credit account, default and incur a judgment. UTMA custodial savings accounts may be set up to postpone distributions until age 25, thereby allowing more time for the adult owner to incur debt and a judgment.
Garnishment
Garnishment is a legal means by which creditors take money from your wages and bank accounts. Creditors may only garnish accounts after obtaining a judgment. Most states require that creditors with judgments file for and obtain a writ of garnishment, a court order, which instructs the bank to freeze the money in the account as payment for the debt. The debtor with the judgment against him must be listed as the owner of the bank account before a writ of garnishment may be issued. If the debtor is listed as one of the owners of a custodial savings account, then the account may be subject to garnishment.
Exemption
The source of the funds within the custodial savings account is also a concern if a garnishment order is issued against the account. While the account is frozen, the custodian or owner of the custodial savings account has 21 days to petition the court for an exemption to garnishment based on the source of the funds within the account. Federal garnishment laws protect certain income sources from garnishment, including a portion of wages, Social Security income, child support payments and pension income. Individual states designate specific income that is also exempt from garnishment.