By Chris Ann Wright
Imagine your son or daughter is six months old and as a conscientious parent, you open a 529 Plan with your child as the beneficiary. During the marriage you and your spouse contribute funds to the 529 Plan in the hopes your child will someday attend college. Fast forward ten years and you and your spouse decide to divorce. What happens to the 529 Plan? Who is the owner of the account? How are the funds divided? Which parent gets the credit for the funds when paying for college expenses later on?
First, most 529 Plans only allow one person to be the owner of the account. Some plans do allow spouses to open a 529 account together, however that is not the norm and varies by plan. A 529 Plan is not like a bank account where you can have two names listed on the account whether or not the parties are married or related. Often, when divorcing, parents will request that his or her name be added to a 529 account so both parents can have access to the funds. Unfortunately, while more than one person can contribute money to the 529 account, only one person can be the owner. That means only the owner of the account will receive statements and/or have access. Although, it may be possible to grant the other spouse online access to the account so that the other spouse can monitor to the money, the other spouse will have no ability to veto any changes made to the account. If the owner of the account wants to change the investments or pay for a private high school with the money regardless of your objections, he or she will be able to do so.
Second, if the original beneficiary of the account (your child) does not use the money for education, it can be rolled over to another beneficiary such as another one of your children. However, if only one person can be the owner of the account, there is nothing stopping that parent from rolling the benefit over to one of his or her step-children or a niece or nephew. In addition, the owner of the 529 account can liquidate the account without permission from the other spouse subject to income taxes and the ten percent penalty.
Keep in mind, it is possible to put safe guards in place through a Property Settlement Agreement but such an agreement may not stop the transaction. It is possible the plan administrator is unaware of the agreement you have with your ex-spouse, and unknowingly allows the money to be withdrawn. In order to remedy the situation you would have to file a motion in court for enforcement of the Property Settlement Agreement and to be reimbursed for the missing money by your ex-spouse. At Lyons & Associates, P.C. we can assist you in the division of 529 Plans and the payment of college expenses for your children after you are divorced. For a private consultation, contact us by e-mail or call our office at 908-575-9777.