Do children get access to a 529 college savings plan in the event of a divorce?
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My wife and I have two children, ages 8 and 6. When the kids were born, my mother-in-law and her partner started 529 Plans for them, and they’ve been involved ever since. My wife and I did not contribute to a 529 college savings plan; Instead, we have contributed custodial accounts to the UGMA/UTMA accounts for each child so that they have more flexibility as they grow up.
Since they started 529 Plans, my mother-in-law and her partner have been married, but their relationship is now very strained. My mother-in-law’s husband opened the 529 plans. Her mother-in-law and her husband live on community property. How can I protect my children’s 529 plans? If they are split, what will happen to the 529 plans?
There are certainly other issues that would take priority if they broke up, but this seems like something that could be dealt with now. I know 529s are great investment vehicles, especially in light of the new rules about converting them into a Roth IRA. I have allowed myself to be ignorant of the accounts, assuming they were taken care of, but I am not so sure now.
concerned parent
Dear concerned,
Your children are the beneficiaries of this account, and the owner — presumably your mother-in-law, in this case — controls how much is contributed to the account. 529 tax-advantage college savings planThe allocation of investments and how and when they will be distributed. She, as the account owner, can change the beneficiary if she so desires.
UGMA/UTMA accounts — aptly named the Uniform Gifts to Minors and Uniform Transfers to Minors Act — works differently. They are custodial accounts where the adults retain control of the account until the child reaches maturity. It is usually taxed at the child’s tax rate — assuming the funds reach the income tax threshold — rather than the parent’s tax.
Of course, the best way to solve this problem is to do it amicably, without resorting to the courts. Legal proceedings can be time consuming and expensive, and may or may not be worth it given the amount of money invested in the 529 plan. Find out from your in-laws who owns the 529 account. The trustee cannot change the beneficiary, but the owner can.
There have been some court cases surrounding ownership of such plans, and on numerous occasions they have treated the 529 accounts as child property, even though they are in a parent’s name. According to the law firm Goldsberry, Portz & Lutterbie. I have reviewed a range of cases from Texas to Ohio and New York regarding the division of these accounts in the event of divorce.
How have divorce courts ruled on 529s?
in Ramsay vs. Ramsay And in Ohio, “the court has considered the money in the 529 plan accounts to be something other than marital or separate property,” the company says. “The court considered the accounts to belong to the children of the two parties who are not subject to division between the parties during the divorce. Courts in Indiana also treated the 529 accounts as separate from the parents’ property.
in Zuchowski vs. ZuchowskiThe two divorced parties in New York agreed to share college expenses 50/50, and to keep the 529 plan in the wife’s name, but years later when she tried to use that to reduce her share of college expenses, the court refused, and said the account should not benefit either party, but should be used entirely for the education of Child. (New York and Ohio are not community property states.)
However, “while a 529 account may be legally in a parent’s name, the courts are more likely to consider the funds in the accounts to belong to the children and not force the parents to split the account, thereby withdrawing the money and paying a fine.” During the divorce, Goldsberry, Bortz and Lotterby said. This should help ease your immediate concerns about your children’s 529 plans.
You’re right, starting in 2024, your relatives will be allowed to roll over money of up to $35,000 from their 529 plans into a Roth IRA owned by the 529 plan beneficiary. This is designed primarily for people who have excessive amounts in their 529 accounts. Meanwhile, I hope your in-laws make the right decision for them regarding their marriage, and I wish you well.
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