Can a Lien Be Placed on a Custodial Account?

As an account custodian, you have access to the account, but not ownership

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When a lien is placed on a bank account, you have the right to contest its validity. If you're not the owner of the property, but only its custodian, the lien is generally considered invalid if it relates solely to your debts. However, if you treated the property in your custody as your own, such as using account funds for your living expenses, the lien may be valid. It also will be considered valid if the owner of the property in the custodial account is an adult and the lien relates to his debts.

Custodial Accounts

A custodial account is use to hold property for the benefit of a person who cannot or should not have access to the property. For example, the beneficiary of the account can be a child under age 18 or an adult who cannot manage his finances. The custodian can be an individual, such as a parent for a child, or a legal entity, such as a bank or other financial institution for an elderly person. Even though the beneficiary does not have access to or control over the account, the beneficiary is the account owner. The custodian has no ownership rights in the account.

Liens For Debt Collection

Your unpaid debts, such as a monetary judgment or delinquent taxes, can result in creditors placing a lien on your assets in an attempt to collect the debts. The creditor places the lien on your property according to state law and you are given notice of its existence. Before the property is turned over to the local sheriff or marshal for payment on your debt, you are given time to go to court and challenge the lien's validity. If you demonstrate to the court that the property is not yours, but held in a custodial account, the court will order the lien be released.

Crossing the Line Between Access and Ownership

If an account custodian mismanaged the account funds or set up the custodial account for an improper purpose, creditors can challenge a debtor's claim that he is merely the custodian and not the account's owner. For example, the government can place a tax lien on a custodial account set up by a parent for a child by alleging that the parent used the account for an improper purpose -- to avoid tax liability. If a custodian commingled his own funds with the custodial account and pays his personal expenses from the account, a creditor can place a lien on the account by alleging that the custodian is using the account as an owner. Courts have upheld such challenges and allowed the creditor’s lien to remain on the account.

Beneficiary's Debts

Children under age 18 are prohibited by state law from making contracts and cannot incur any debts. Accordingly, no lien can be placed on the child's custodial account due to her activity. Although a custodial account usually terminates when a child reaches age 18 -- in which case the child has full control of the account -- state laws generally allow a custodial account for a child to remain in effect until age 21. In California, the custodial account can remain in effect until age 25. If the child incurs debts after age 18 that are not paid, a lien can be placed on the child's custodial account if it is still in effect.