20 Sep Protecting College Savings in a Divorce

Couples who choose to divorce later in life often have a multitude of financial assets that need to be divided up in the final settlement, and one of these accounts could be a 529 college savings plan. If the divorcing couple created a 529 college savings plan for their child, then special care will need to be taken to ensure the children’s future education is not disrupted as a result of the separation. By not addressing the 529 plan, the accessibility of the college funds is uncertain when the child needs to access the account for education.

Secure the Account

A state-sponsored or privately-obtained 529 college savings plan is set up by one or both parents, and usually names one beneficiary. During divorce proceedings, both parties should review the most up-to-date regulations that are assigned to the plan. (For example, Illinois changed the regulations and fees on its state-sponsored plans in 2017.)

Share or Split the Account

There are several options for how the 529 college savings plan can be handled after the divorce. The final settlement should be based on how best the parents can work together towards the child(ren)’s education.

Split the Account: The flexibility of the 529 college savings plan does allow for this option, although there may be associated fees. However, this may be the best option when parents do not get along, as both parties can amicably split the savings and choose how they would individually like to invest.

Continued individual ownership of the account(s): It is possible for parents who are no longer married to continue to hold and contribute to the savings account established during the marriage long after divorcing. It is recommended that the marital settlement agreement define how and by whom the funds are used to prevent any additional litigation down the road.  

Additional Tips

During the divorce process, both parties should create detailed instructions on how the account will be handled in different situations. For example, if the child decides not to go to college, the parents will need to collaboratively decide how the funds will be used, and who will pay the tax penalty for not using the finances on education. Additionally, parents should seek a judgement that allows both parties to see the account statements to maintain maximum transparency.

Since each state has unique laws and rules regarding 529 college savings plans, divorcing parties should seek legal assistance from a local attorney on how to maximize the benefits from these accounts in a divorce.