During your marriage, you and your spouse may have had the prudence to establish a 529 college savings plan for your child. If this is the case, it is important that you do not overlook the plan in your divorce.
If you are like many people, you may mistakenly believe that the beneficiary of a 529 plan controls the account and its funds. The truth is that the account owner, meaning the person whose name is on the account, controls it and the money. Typically, 529 plans only allow one account owner. If your soon-to-be ex-spouse is the primary owner, and if you fail to address the plan in your divorce decree, the account owner may legally deplete your child’s college savings for non-qualified expenses. Saving for College explains how the account owner may abuse the funds in a 529 plan and what you can do to prevent him or her from doing so.
How a 529 account owner may abuse his or her responsibility
529 plans offer ample flexibility, which is why you, like many other parents, may have chosen to use one as your college savings vehicle. While this flexibility may have been beneficial during your marriage, it can prove costly during and after your divorce. This is because account owners have full control over the plan and its funds and may abuse that power in the following ways:
- He or she may deplete the plan’s funds by making non-qualified distributions to pay for things unrelated to the beneficiary’s higher education.
- He or she may use the funds to pay down student loans or further his or her own education.
- He or she may remarry and change the plan’s beneficiary to a new child or a stepchild.
- He or she may roll the funds over into another 529 plan on which he or she is the named beneficiary.
If your former spouse does any of the above, he or she may unwittingly deny your child a chance at higher education.
How to protect the funds in a 529 plan
If your former spouse is the 529 plan owner, the only real way to protect the funds is to include instructions for their use in your divorce decree. Though you should tailor your instructions to your unique situation, Saving for College suggests using language that provides instructions for how either you or the account owner may use the funds; that requires the account owner to notify the other parent of when it plans to make a distribution; that requires approval from both parents before the owner may change beneficiaries; that dictates who will make future contributions and how; and that details how the account owner must handle leftover contributions. The account should also detail what should become of the funds if the beneficiary decides not to go to college and whether the plan’s funds should count toward either parent’s college support obligations.
A 529 plan can prove hugely beneficial for your college-bound child. However, when left in the wrong hands, the money may benefit the wrong person.