Protecting 529 Plan in Divorce

A 529 plan (“Plan”) is a tax-deferred college savings plan that allows for funds to be used tax-free for qualified educational expenses. The new tax code now allows parents to withdraw up to $10,000 annually, tax-free per student, to pay for K-12 tuition.

Mediator and Certified Divorce Financial Analyst Denisa Tova says, “the dilemma often arises about protecting 529 plan in divorce and who should “control” the Plan after divorce because there can be only one account owner. If a family has two children, each parent can be the account owner of a Plan set up for each child. Parents can negotiate various options after divorce”.

They can simply ‘earmark’ the Plan as the child’s asset and determine if and how much they will each contribute to the Plan. Let’s say the dad is the account owner. He can also request from the Plan’s financial institution that a duplicate account statements be delivered to the mom, and for both parents to be informed of any withdrawals.

Some parents set up shared account passwords to maintain access. The divorce agreement can also spell out how the funds are to be used and provide the age at which the child becomes the owner (age 18 or older).

This is not an iron-clad prevention of a potential abuse where the account owner empties the Plan, but it might give the non-owner parent some legal basis to seek replenishment of those funds.

Another option is to split the account into two accounts within the same program, if the Plan so permits.  One child-student can be the beneficiary of both accounts. Therefore, each half of the plan would be set up as a new account and owned by one parent, who would control investment decisions for his/her half of the account.

Dealing with 529 Plan is just a piece of a complicated divorce financial puzzle.

Denisa Tova MBA, CFP, CDFA is a Mediator and a Certified Divorce Financial Analyst.