Onward Intel: 529s During Divorce

Navigating 529 college savings plans during a divorce can be complex, as they involve financial, legal, and custodial considerations. Here’s a breakdown of key steps and considerations to help manage them effectively:

Determine Ownership of the 529 Plan

• Account Owner: Typically, one parent is the account owner, while the child is the beneficiary.
• Control: The account owner controls the plan, including changing beneficiaries or withdrawing funds.
• State Laws: Ownership may depend on state laws, so consult your attorney or financial advisor to clarify this.

Discuss the Plan in the Divorce Agreement

Include the 529 plan as a marital asset to ensure it is addressed in the divorce settlement.

Consider specifying:

• Who will retain ownership of the account.
• How contributions will be handled post-divorce.
• How funds will be used for the child’s education.
• What happens to the account if one parent withdraws funds improperly.

Decide on Future Contributions

• If both parents plan to contribute, establish guidelines (e.g., contribution amounts or frequency) in the divorce decree.
• If only one parent retains ownership, the other parent may want to establish a separate 529 plan to maintain control over their contributions.

Clarify How Funds Will Be Used

Specify:

• Which expenses are eligible (e.g., tuition, books, room and board, or other qualified expenses).
• Whether any leftover funds can be used for another child or beneficiary.
• Address how the funds will be divided if there are multiple children.

Protect Against Misuse

• Include provisions to ensure the account owner cannot misuse the funds (e.g., withdrawing for personal reasons).
• Legal agreements can specify that funds must be used for the child’s benefit and require proof of usage.

Address Tax Implications

• The account owner maintains control and, therefore, the tax benefits or liabilities associated with the plan.
• Work with a tax advisor to understand how the plan will impact each parent after the divorce.

Consider a Third-Party Trustee

• If there is mistrust between parties, appointing a neutral third-party trustee to oversee the plan can ensure funds are used as intended.

Update Beneficiaries if Necessary

• If the original beneficiary is no longer the intended recipient, the account owner may need to update the beneficiary designation.
• Ensure this complies with any agreements made during the divorce.

Consult Professionals

Attorney: To ensure legal compliance and include 529 plan details in the divorce decree.

Financial Advisor: To strategize future contributions and plan management.

Tax Advisor: To handle any tax implications from ownership or withdrawals.

 

Additional Considerations:

If you or your ex-spouse have questions or disputes about managing the plan post-divorce, mediation might be a useful way to work through disagreements without escalating to court.

This document provides a framework but should be customized based on your situation. Consider consulting a family law attorney to ensure compliance with state laws and enforceability.