What Happens to the 529 College Savings Plan in a Divorce?
One of the most impactful investments parents can make to propel their children into a successful future is investing in their college education. However, as the cost of tuition, books, and room and board only seem to exponentially rise, saving for college can seem daunting. Parents may choose to contribute to a 529 College Savings Plan – a tax-advantaged saving and investment program – in order to save for higher education expenses for their children. The investment earnings are not subject to federal income tax and can be utilized by children in the future for the higher education expenses. Additionally, so long as the contributions are withdrawn to pay for qualified education expenses, the funds are not subject to North Carolina state taxes. 529 College Savings Plans prove to be an immensely valuable tool in helping families financially prepare for their children’s college education.
As such, one of the first questions we get from parents experiencing separation or divorce: How can I preserve the 529 College Plans for the benefit of their children?
The property that is acquired during your marriage is generally subject to distribution via the Equitable Distribution laws in North Carolina (or other comparable property division laws of your specific state or jurisdiction). If, after the separation or divorce, one of the parents will retain ownership and control over the 529 College Savings Plan as the account holder, said parent can control the funds within the Account, including withdrawal of associated funds. Therefore, funds in a 529 College Savings Plan are considered marital property and subject to distribution even if it was and continues to be the intent of one or both parents to use said funds solely for the higher education costs of their children.
Knowing that an ex-spouse may be entitled to the money intended for their child’s future education may create an anxiety-inducing situation, but there are ways to protect 529 College Savings Plans. For example, parents may choose to fully “gift” the funds in the Account to the child or restrict the use of the 529 Plan in a negotiated settlement. Parents can also specify that the funds in a 529 College Savings Plan may only be withdrawn for a child’s education in a prenuptial agreement (a.k.a. premarital agreement) or a postnuptial agreement. Taking steps to secure the investment in your child’s future is worth the peace of mind.
If you or someone you know wants to learn more about how property division incident to separation or divorce affects investments, our Modern Legal Team is here to help.
Please note: these educational materials are based on North Carolina law where my legal practice is based. While the insights may have wide applicability, readers should consult with an attorney regarding the specific laws in their state or country.
Written by: Theresa E. Viera
