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Don’t neglect your child’s 529 plan in your divorce

| Dec 29, 2020 | Divorce |

No responsible parent wants their divorce to upend plans for their child’s college education – even if it’s many years away. That’s why it’s essential to deal with your 529 plan in your divorce settlement.

These college savings plans are designed to help parents make tax-deferred contributions towards their children’s higher education expenses. They are sometimes overlooked by divorcing parents because it is assumed that they belong to their children. However, they don’t.

Understanding 529 plan ownership

The child is the beneficiary. The account is owned by the person who opened it. Many 529 plans only allow one account owner. However, assuming the account was opened after a couple was married, it would typically be considered a marital asset – particularly if both parents funded it. Under California’s community property laws, it could be equally divided.

Most parents have no intention of using the plan for anything other than their child’s education or at least their benefit. However, they’re legally allowed to use the money for anything. The only tax consequences they’d face are on the earnings portion of the amount withdrawn – not on the amount they contributed. They could also change the beneficiary to a stepchild in the future.

Common agreements regarding 529 plans

If a judge has to weigh in on the plan, they could give one parent the 529 plan in the settlement or exclude it from the marital assets that are being divided. Regardless of how the 529 plan in addressed in the property division portion of your divorce, you can seek provisions in your settlement to prevent the parent with ownership rights from using it for anything other than your child’s education.

You can seek to include instructions on how the funds can be used. You may also seek to stipulate, for example, that:

  • The non-account holder must be notified prior to any distribution
  • Both parents have to agree to a beneficiary change
  • The non-account holder must get regular plan statements
  • Both parents must agree to how to handle the funds if the child doesn’t attend college or if there are leftover funds
  • Plan contributions either do or don’t count towards a parent’s child support obligations

Whether you’re listed as a 529 plan owner or only your spouse is, you will need to address this in your divorce settlement negotiations. Your family law attorney can advise you on how to best protect this money for your child.