529 Plans and Divorce – Community Property to Be Divided?

When it comes to 529 Plans and Divorce, there are a lot of questions. Here is a breakdown of what a 529 plan is and how it can be divided during a divorce.

What is a 529 plan?

A 529 plan is merely a tax-deferred college savings plan. The number 529 refers to the section of the IRS code that has established college savings plans. A 529 plan is a tax-free account that can be established up for the benefit of a child. When the time comes for the child to start attending college, then the money from the plan can be withdrawn.

A significant benefit of a 529 plan is that they provide to the person(s) who established the account with control. The giver of the 529 plan retains control of the account through the payment to the college. The donor can even take back the gifted money, but they must pay a 10 percent penalty.

A critical aspect of a 529 plan is that it is not considered to be an asset for purposes of determining financial aid. Thus, a child may be able to get substantial financial aid, and still, have the benefit of using the funds from their 529 plan.

How are 529 plans treated in a divorce case?

College costs can be tremendous today, and it is brilliant to plan for your child’s education even if you are getting divorced. College contribution cases are costly, complex and never-ending. Many college contribution cases are more complex and take longer than the original divorce case. Moreover, there is nothing worse than reopening up “old wounds” and to litigate with your ex-spouse. Therefore, as college costs continue to rise at an exponential rate, many divorcing couples must seriously consider keeping their 529 plans fully intact and funded.

In most cases, the parties will agree that any 529 plans will remain intact for the benefit of the children. Nonetheless, it is important to emphasize that 529 plans have only one account owner, either you or your spouse. The child is only considered to be a beneficiary of the plan. Thus, the named account owner can make a withdrawal at any time for any reason. However, the withdrawal is subject to taxation and penalties. Thus, it is important to emphasize that a 529 plan is considered to be an asset of the account owner and not the child.

529 After Divorce

Moreover, keep in mind that people get remarried. The new spouse of your ex may be immoral and nag him to cash in the 529 plan to pay for marital expenses. Perhaps a spouse might be desperate, and he has to cash in a 529 plan to pay the mortgage. In the real world scenarios such as this happen all of the time.

Thus, when you get divorced, you have to carefully address how 529 plans will be administered in the future. The most logical solution is to split a 529 into two separate accounts. College savings plans are marital assets, and they must be equitably divided if at all possible. If these plans are not spent for college, then the account reverts to the spouse whose name is on the account. Be aware that the spouse/parent who established this account may withdraw the funds, without any fiduciary duty owed to the child.

Given these dynamics, in any divorce context, a 529 plan should be split. A 529 plan has just its own owner, and this is fine when the parents are married. However, when they get divorced all bets are off. In many divorces, it is common for a divorced father to be alienated from his children. Consequently, the divorced father could very well cash in the 529 plan if he has no real and substantial relationship with his children. Moreover, given the hard times that we are now in, a financially squeezed parent could very well cash in a 529 plan if he is out of work and is desperate.

529 Asset

In summary, people getting divorced often view a 529 plan as the child’s assets. However, a 529 plan is an asset of the marriage. I always advise my client’s to split the 529 accounts. The divorcing couple should elect to split the 529 account into two separate accounts. By splitting a 529 account, this allows both spouses to contribute to the college fund without having to worry that your ex-spouse will take your money out of the account or close the account. Spitting 529 plans is a relatively straightforward procedure, and there are no fees or penalties to accomplish this. Another option is for the spouse without the 529 to open a new plan and to begin making contributions. However, I don’t recommend this option.

Divorce Mediation

Do you need help with your divorce and have a 529 plan? Contact West Coast Family Mediation Center for a free consultation!

by: Amanda Singer

Amanda Singer with west coast family mediation center

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