A 529 plan (Section 529 of the Internal Revenue Code) is a tax-free investment account which authorizes the establishment of accounts set up for future qualified higher education expenses for a minor child, or for private school tuition for a minor child. Although the money in a 529 plan is for the benefit of the child, the parent(s) who creates the account owns the account. For a divorcing couple, that 529 plan is an asset of the marital estate and needs to be addressed in your final settlement agreement. Several options are available for how divorcing couples can deal with a 529 plan: the account can be kept and maintained as is, or the account can be split into two separate accounts for each parent, or the parties can agree to freeze the account until the child reaches the required age. Another alternative is the parties could agree to close out the account and distribute the funds, minus the tax penalties and administrative expense.
If you and your spouse wish to keep a 529 plan intact, it would be prudent to set forth terms in your marital settlement agreement to address the issues of how the account will be managed going forward after the divorce. Among the considerations are the various funding options; how the funds are to be distributed if the child does not pursue a college education or receives a full scholarship; and the language preventing an account owner from prematurely withdrawing the funds without an agreement from the other parent. It is extremely important that parties do not forget to add a successor account owner to each account which allows that named individual to assume all rights and responsibilities of the account should the account owner pass away or become legally incapacitated. If this issue is left unaddressed after the divorce is final and the account owner names a successor owner other than the other parent, it can create additional unnecessary and expensive legal issues.
Ultimately, while it is a wonderful plan for married couples to invest in education savings accounts for their children, it is equally as important for divorcing couples to properly address and safeguard these accounts so that their children do not lose the benefit of these assets. Addressing 529 plans in a divorce settlement is best when handled with the help of an experienced attorney.
