If you are like many parents who set up a 529 plan for their potentially college-bound child, you may have assumed that the plan is the property of your child. You would have assumed wrong.
A 529 plan is the property of the account owner, which is typically a parent. Only one person can own a 529 plan, and that person has full control over it. If your soon-to-be ex-spouse’s name is on your child’s 529 plan, Saving For College encourages you to take legal steps to protect the account and the funds within it. The publication shares why, and what you can do to safeguard it.
The consequences of leaving a 529 plan unprotected in divorce
Leaving a 529 plan unprotected in a divorce may prove to be a financially devastating error for you and your child. This is because unless you think to state otherwise in your divorce decree, the account owner — your ex — can make legal distributions for non-qualified expenses at any time he or she chooses. He or she may even change the account beneficiary to a child he or she has with another individual, or even to a stepchild.
You may hope that the tax consequences of using the funds from a 529 plan for non-qualifying expenses — meaning anything other than school-related expenses — may be enough to deter your ex from doing so. Unfortunately, there are few tax consequences associated with withdrawing money early from this type of account. Only the earnings portion is subject to a 10% tax penalty. A 529 account owner will never pay a penalty on the contribution portion of the distribution.
How to protect your child’s college savings
If you and your spouse opened a 529 plan for your child, it is crucial that you do not overlook it in your divorce. Though the assets technically belong to your spouse, you can include instructions in your divorce decree for how he or she may or may not use them. Some example stipulations that may protect the funds are as follows:
- A provision mandating that the account owner must notify the non-account owner at any time he or she wishes to distribute funds
- Instructions detailing how the account owner may or may not use the funds
- Instructions mandating that both parents receive 529 plan statements
- Instructions regarding who will make future contributions and how the account holder will handle them
- A provision barring the owner from changing the account beneficiary
You and your spouse should also address items such as what should become of funds if there are any left once your child graduates college. If your child decides not to go to college, the decree should detail what is to become of the funds. Finally, the decree should state whether the 529 plan counts towards the owner’s financial obligation for college costs.
You and your spouse started a 529 plan to better your child’s future. Even if you do not believe your spouse would do anything to jeopardize that future, take steps to protect the account before you no longer have a say.