Divorcing parents who have a tax-advantaged 529 plan to save for their child’s college education often don’t put that at the top of the list of assets to consider as they divide property. However, it’s critical not to lose sight of what happens to the funds in that account – especially if you aren’t the owner.
These accounts typically only allow one owner, who is generally a parent or other family member. The child is the beneficiary. Note that while only one child can be the beneficiary at a time, if you have more than one child, you can alternate them as beneficiaries as you take distributions for their educational needs.
What could the parent who owns the account do with it?
That parent could conceivably empty it and use the money for whatever they wanted. The distributions just wouldn’t be tax free if they aren’t being used for qualified education expenses (like tuition, books and student loan repayment).
That parent could also choose to change the beneficiary. For example, if they have a child with someone else or become a stepparent, they could make that child the beneficiary. They could even use the funds toward their own student loan debt.
How can you keep the money from being misused?
Even if you can’t imagine your co-parent doing these things, it can be worthwhile to protect that money in your divorce. How can you do that if you aren’t the owner of the account?
You can seek to include language in your divorce settlement that details rules about the account. For example, you could ask to stipulate that:
- The funds may only be used for the child who is currently the beneficiary (or one of your other children) and their qualifying educational or vocational training expenses.
- The non-owning parent must receive the plan account statements.
- No distributions can be made without the non-owning parent’s written consent.
If you don’t feel comfortable making contributions to a plan owned by your co-parent, you can also establish another 529 plan that you own. A child can be the beneficiary of more than one 529.
Ownership of the 529 plan(s) will also come into play when it’s time to complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is just one more thing that requires co-parents to communicate and cooperate as their children get older. That’s why it helps to keep your negative feelings about one another from getting in the way of ensuring that your child’s educational future doesn’t suffer because of your divorce.
