One of the most important assets a couple can have may also be one they forget about as they’re determining how to divide things up – a 529 savings plan. These are tax-advantaged plans that parents often open to save for their children’s educational needs.
These accounts are somewhat unique in that they can only have one owner, so they’re typically opened under one parent’s name, with the child listed as the beneficiary. The funds in the account, however, belong to the owner.
What could go wrong?
That means a parent could potentially close out the account and take the money. A major drawback would be that if the funds aren’t used for a qualifying expense (like college fees, K-12 fees, vocational training expenses or to pay off student loans for the beneficiary), they’re taxed as income.
That parent who is the account owner could also potentially change the beneficiary to be a child from a subsequent relationship or marriage. These accounts allow parents to change the beneficiary so that they can use the funds for more than one child as needed.
Protecting the assets you’ve saved
Certainly, most parents don’t empty their child’s 529 account in divorce or give the money once intended for their child to another child they have later. However, if you aren’t the owner of the account, it’s wise to take steps to protect those funds so they’ll be there when your child needs them.
You can advocate for language in your property division or other agreement that mandates things the following:
- The funds may only be used for one of the children you have together.
- You get copies of the account statements whenever they’re issued.
- Your co-parent can’t make withdrawals (distributions) without your written consent.
If you and your co-parent have been making contributions (deposits) of joint assets to the account or you’ve both been making contributions of separately owned assets, you may feel more comfortable opening another 529 account with you as the owner. A child can be the beneficiary of multiple accounts. If you do this, you may also want to include an agreement that each of you will continue to contribute a specified amount each month, quarter or year.
If you have a 529 savings plan for your child(ren) – particularly if you aren’t the owner – it’s important to address it as early as possible in your divorce. Find out more about how to best protect the money you’ve saved for their education.