How Will Divorce Affect a 529 Plan?

529 plans are named for Section 529 of the Internal Revenue Code, which authorizes investment accounts to be set up for future college expenses for minor children, which can grow and be disbursed tax-free.  In some cases, a 529 plan can be even be used for school tuition and expenses for grades K-12.  However they are used, many parents take advantage of the tax savings that come from using these plans to prepare for their children’s academic future.

So, how will a divorce affect your 529 plan?  Should it even matter if the money is set aside for the child?  The short answer to both of these questions is a resounding “yes”!

To address the second question first, it is important to remember that, although the money in the account is for the benefit of the children, as minors, they cannot actually own the accounts.  The parent who sets up the plan owns the account.

That means that, even though the purpose of the account is to benefit the child, it’s owned by their parents and, like any asset, must be divided as part of the divorce.  Whoever owns the account decides how the money is spent (even if it’s not spent for the intended purpose of the child’s education).

Because the 529 account is a marital asset like any other, there are several options for how it can be addressed as part of the divorce, including the following options:

  • Split the account;
  • Freeze the account until the child reaches the age of majority;
  • Stipulate and agree on terms for the use of 529 funds; or
  • Add a third party to the account to manage it.

Additionally, if the parties intend to keep the account for the benefit of the child, they will want to address the issue of future funding to the account.   Will they continue to put money into the account or just leave as is?  If they are continue to fund the account even after the divorce, will it be both of the parties or just one of them?  How much and will there be any minimums or maximums on contributions?

Sorting out financial assets in the divorce can be messy, but this specific asset is intended for the benefit of the child/children.  If not properly addressed, the child may not only lose the benefit of the intended funds, but there can even be tax consequences to the parties if the funds are handled improperly.  Therefore, addressing the disposition of a 529 account at divorce is best handled with the help of an experienced attorney.

If you find yourself or a loved one in need of a divorce with children and you would like to work with one of our experienced Attorneys, please call OWENS & PERKINS at 480.994.8824 to schedule your free 30 minute consultation.