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Who Gets Custody of the 529 Plan in a Divorce?

Posted on in Divorce

Will County divorce attorney, 529 Plan and divorceWhen parents of young children are divorcing, they are typically focused on immediate life issues—which parent will live with the children, where will the children spend holidays and school vacations, and who will pay for childcare? Frequently, one of the important matters that gets overlooked is how will the children’s college education be paid and who will “own” those college funding accounts.

Many families open a 529 plan—also referred to as a qualified tuition plans—to fund their child’s college education. These plans are operated either by the state or by certain educational institutions. There are certain tax advantages to these plans which make them attractive to parents.

If parents are divorcing, then one option is to freeze the account. There can be no more deposits made to the account, and funds are only allowed to be used for the education of the child of whom it was set up.

In regular circumstance, parents are allowed to withdraw funds under penalty to use for other reasons. By freezing the account, it ensures that neither divorced parent will be able to utilize the funds for anything other than for what the funds were originally intended.

Another option is to make one parent the sole owner of the account. Some financial advisors recommend the non-custodial parent as the sole owner. This has to do with the requirements for federal financial aid. When a student applies for federal aid, only the custodial parent’s income and assets are considered. None of the non-custodial parent’s assets are counted. If the custodial parent is the owner of the 529 account, then the government will also consider those funds as assets for the custodial parent, which could impact the amount of grants and other aid for which the student qualifies.

The problem with one parent being sole owner is that the other parent has no say or control in any decisions that are made with those funds. This could cause problems if there are still acrimonious feelings left over between the two.

A third option is for the judge to order the 529 plan to be divided equally between the two parents and for two new plans to be set up under each parent’s name. Since it would be coming directly from a court order, the state or institution who oversees the plan are required to abide by the order.

It is hard to keep track of all the issues that could arise during the divorce process. Therefore, it is important to contact an experienced Will County divorce attorney to ensure that you and your family’s needs are fully protected.

Sources:

https://www.sec.gov/investor/pubs/intro529.htm

http://www.usnews.com/education/best-colleges/paying-for-college/articles/2013/04/29/discuss-college-savings-during-divorce-process

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