Choosing & Protecting Your Child’s College Savings Account During & After Divorce
As family law attorneys who practice here in Florida, an increasingly common issue that we deal with when it comes to divorcing spouses is addressing custodial and 529 accounts. Even when a divorce is amicable, problems can still arise with respect to budgeting for a shared child’s college plans.
529 accounts allow people to save and invest for college, while avoiding taxes. The funds, when withdrawn, are also exempt from federal taxation, as long as they are spent on “eligible” education expenses (tuition, books, housing, meal plans, computers, etc.).
Still, if not properly addressed in the separation agreement, some of them are subject to a number of changes that you may be opposed to. While the general rule is that the custodial parent becomes the owner of the 529 account, with more and more courts encouraging equal, shared parental responsibility (unless they find that it is detrimental to the child), the management of the college savings account must be explicitly addressed in the separation agreement; the contract that outlines how everything is divided. In particular, it is very important for spouses to know that, legally, these funds belong to the child as the beneficiary, and are not available to a spouse to withdraw and use as their own.
Below, we discuss some of the details associated with each type of account that is relevant to college savings during divorce, and how to protect them:
529 plans provide a certain amount of flexibility such that one spouse could try to change the beneficiary of record and withdraw the assets to pay for their own or someone else’s education expenses, or simply revoke the account. This is why it is crucial that the separation agreement specify that the funds are only to be used for your child (i.e. and include specific identifying information for that child).
Coverdell Education Savings Accounts (ESAs)
Note that Coverdell Education Savings Accounts (ESAs) operate in almost the exact same way as 529 plans, however, they must be paid out to the named beneficiary within 30 days of the beneficiary turning 30, which can result in penalties and tax consequences. In addition, they are transferred upon divorce, and the subsequent owner treats the account as though they were the original owner.
Custodial 529 & UGMA/UTMA Accounts
The best way to ensure that an education account is only used for one particular person is a Custodial 529 and/or UGMA/UTMA account, as the beneficiary on these accounts cannot be changed. However, note that the beneficiary can only take ownership of the account once they reach the age of majority (age 18 in Florida).
Other Funds That Might Be Used for College Savings
Other funds affected by divorce (i.e. subject to division) that also need to be addressed in the agreement include:
- Roth & Traditional IRAs (the portion accrued during the marriage)
- Qualifying US Savings Bonds (note that these can be sent back to the Treasury with instructions to split and reissue upon divorce)
- Qualified withdrawals: an attorney is going to need to assist the student if they, for example, need to withdraw funds to help pay for rent associated with living with a parent, or if that parent has to withdraw funds to help pay for costs if the beneficiary becomes disabled, etc.
- Successor owners: you will also need to specify a successor in the event of the beneficiary’s death, as anyone who receives the account via probate can change the beneficiary
- Statements: note that even if you are not a joint account owner, you can be listed as an interested party on the account so that you always receive statements and know what is going on
If You Have Any Worries or Concerns Regarding Your Child’s College Savings in Your Divorce, Contact Our Florida Divorce & Family Law Attorneys Today
Family matters can become potentially volatile when it comes to dealing with property division, especially when there are concerns over the well-being of a child’s future. Contact our experienced Tampa family attorneys at HD Law Partners today to help ensure that you and your loved ones are protected throughout this process.