What Should We do with the 529 Plan?
What Should We Do with the 529 Plan?
During a divorce, 529 college savings accounts are often neglected because many divorcing parents assume that the asset belongs to their child. A 529 plan, although intended to benefit the child, is a marital asset that must be addressed during the divorce process. Addressing the ownership of a 529 college savings plan during divorce is essential because the Participant, or the parent named as the owner or holder of the account, is the account's legal owner and may dispose of the account's assets as he or she sees fit. Thus, if there is concern that the parent named as the participant may misuse the funds, there may be conflict concerning which parent should take ownership of the account. Below are several suggestions on addressing the issues concerning the 529 plan and what safeguards may be instituted to ensure the 529 plan is used for its intended purpose.
- Split the account. As mentioned above, 529 plans have just one owner. Although this is generally acceptable while a couple is married, when a couple divorces, allowing one parent to maintain control over a 529 plan, the non-account holding parent may have less incentive to contribute the account. However, if the account is split between divorcing parents, each parent will have a stake in their child's education.
- Freeze the account. Freezing a 529 plan has two main practical effects: 1) no more deposits may be made to the account, and 2) the money already in the account may only be used to fund the education of the designated child. Freezing a 529 account may be a workable solution for divorcing parents because it prevents the participant parent from using plan assets for purposes other than funding the child's college education, and it keeps the participant parent from using plan funds to fund the college education of a child from a new marriage.
- Stipulate the use of 529 plan funds. Instead of splitting the plan, parents may also opt to stipulate or agree on how plan funds are used. Specifically, parents may include a clause in their Marital Settlement Agreement stating that 529 plan funds may only be used for their child's college costs. Although such an agreement may not prevent one parent from abusing the plan funds, because the terms of Settlement Agreements are incorporated into Final Divorce Orders once divorces are finalized, if one parent does misuse 529 funds, the other parent may seek court intervention to enforce the Settlement Agreement.
- Interested party statements. Most 529 plans have authorization forms that allow an "interested third-party" to receive periodic statements and all notifications of changes to investments, sales, purchases, and distributions from the account. In cases where the parents agree to allow one parent to maintain control over the 529 account, the other parent may keep track of how that parent manages the account with interested party statements. Although this may not prevent abuse of account funds, the non-participant spouse will at least be aware of any abuse as soon as it occurs.
- Specify successor owners. Upon divorce, the non-participant parent should be named as the successor participant. This is important because if the participant-parent dies unexpectedly, the successor participant parent may immediately assume ownership and control of the account.
- Agree on future funding. Post-divorce, it is often unclear how ex-spouses will share their child's college expenses. By outlining and agreeing on how much each parent will contribute to the plan post-divorce, questions concerning how parents will share college expenses will be resolved.
Determine what to do with any excess. One issue that is often overlooked is what to do with any money left over in the account once the child has completed their education. This may be because parents often assume that any funds in the account will be wholly exhausted funding college expenses. But, what if money is left over? Marital Settlement Agreements should address how the parents will share or use any excess. Some options include using any surplus to fund a sibling's education or using the rest to fund a parent's return to school.