When you have kids, one of the things parents will start early in their life is a college savings plan, called a “529 plan,” which is an investment account offering tax benefits when it's used to pay for education expenses for a designated beneficiary.
Creating a 529 savings account is a wise and responsible choice for many parents. It's thoughtful financial planning that gives them tax benefits for any money put into the account. It's also a manageable way to put money away for your kid's college on a monthly or yearly basis.
Parents often use a 529 plan to pay for college or the cost of private school tuition, if needed, but most spouses use it for college. It's no secret that the price of a college education has been on the rise for years. It's expensive to attend any college or university, even with student loans and scholarships.
Thus, advanced planning is the best way to ensure you have the funds to help pay for your children's college costs. When the 529 plan was created, there was typically no thought of a divorce, but when it occurs, it often becomes a hot topic of debate. Why? Let's review it below.
Here are some facts that most parents don't know about 529 savings accounts:
- The money in a 529 college savings account belongs to one parent;
- The money can be withdrawn for non-college-related expenses;
- The account owner can legally change the beneficiary.
Based on these facts, you can start to get a picture of why a 529 college savings account can become a debate in a California divorce. As noted, one parent is listed as the owner, not the child or both spouses jointly, who probably contributed to the account together.
Further, as noted, the listed owner can use the account money for anything they want if they are willing to pay a 10% tax penalty.
Finally, the account owner can change the beneficiary of a 529 savings account. With these facts now known, how should you handle the account during your divorce? Our California family law lawyers will review this topic in more detail below.
What Are Some Factors You Need to Know About a 529 Plan and a Divorce?
When getting a California divorce and there is a 529 college savings plan established for your children, there are some essential considerations for dealing with the account, such as:
- A 529 account is a marital asset even if one spouse is the owner;
- It's like any other community property if acquired during marriage;
- It's separate property if the account was created before the marriage
This means the college savings account could be listed along with all the other marital property during divorce proceedings. However, since only one name is listed as the account owner, spouses must reach a mutual agreement on handling the account after the finalized divorce. Thus, this often raises a few essential questions:
- Do you trust your spouse to use the money for your kid's college expenses?
- Do you have reason to believe your spouse would drain the account to buy something for themselves, like a new car?
These issues and other similar concerns must be negotiated and addressed during the divorce process.
How is a 529 Plan Divided?
As noted, if the 529 accounts were started before the marriage, they would probably qualify as separate property. Still, if additional contributions were made to the account during the marriage, then at least a portion of it would fall under the umbrella of community property.
If the 529 plan is community property, it will be subjected to division in case of a divorce, meaning the value has to be divided equally.
While dividing a 529 savings account is an option, divorcing spouses frequently agree that one parent, usually the custodial parent, will maintain the entire 529 accounts in exchange for something of similar value in the marital property.
However, this type of agreement can lead to problems, especially in a high-conflict divorce. Why? After the divorce, the parent could take all the money out of the account and never use it for their kid's college expenses.
You probably think that no parent would do that to their children. In most cases, that's true, but there are situations of severe financial distress that would lead a parent to make decisions they would not otherwise make.
Divorcing spouses can split the 529 savings account or come to terms with using the assets in their marital settlement agreement.
Another popular option is to agree that one spouse will maintain control of the 529 plan, but they will only use the funds for their children's tuition and other related college expenses.
Finally, parents could decide to split the 529 plan into two accounts, and each manages the plans themselves. If this is the decision, you will have to open another account and divide the funds into the current account.
Contact a California Family Law Certified Specialist for Help
If you and your spouse are currently saving for your kid's college expenses and have decided to get divorced, you could address the 529 plan contributions in your divorce settlement agreement.
In other words, it doesn't have to become a hotly debated issue. Keeping the best interest of your children a top priority is always the best option.
Child support payments will not usually cover the costs of higher education, so divorcing parents will have to make other plans for college savings and expenses as part of the divorce proceedings.
Suppose you need more information about ensuring that your divorce does not impact your children's ability to attend college. In that case, you can contact us to discuss the details and legal options.
Our Certified Family Law Specialist can guide you through the divorce process and help you resolve complex financial issues and any other matters related to a California divorce.
Furman & Zavatsky are Los Angeles family law lawyers in the San Fernando Valley area of Los Angeles County. We provide legal representation across the state, including Ventura County, Orange County, Riverside, and San Bernardino. We offer a free case evaluation via phone, or you can fill out the contact form.