529 College Savings: Overlooked Asset in Divorce?
Parents who are experiencing divorce may be confused about how to deal with savings that have been set aside for their children’s college educations. The most common methods of saving for college – UTMA custodial accounts and 529 college savings plans – are two different savings vehicles with very different treatment in divorce. Most banks offer “UTMA” custodial savings accounts. “UTMA” stands for “Uniform Transfers to Minors Act,” a law that allows parents to establish savings accounts for their children. Under Pennsylvania law, UTMA accounts are owned by the children themselves, so they are not marital property subject to equitable distribution. Parents are custodians of UTMA accounts during the child’s minority and have a broad fiduciary duty to use the funds for the child’s interests. The divorce court has no power over UTMA accounts, even to designate the fiduciaries of such accounts. The probate courts, known in Pennsylvania as “Orphans Courts”, have the exclusive power over UTMA accounts.
529 college savings plans are a relatively new type of account that enjoy tax-deferral (like retirement accounts) under federal tax law. Most states sponsor these plans, which are administered by large brokerage houses like Fidelity and American Funds. Unlike UTMA accounts, 529 college savings plans are owned by the parent who established them. They are marital property and may be awarded or divided in equitable distribution. If the funds are not spent for college (i.e., the child does not attend college or dies before reaching college age or does not exhaust the funds to pay for college), then the residue of the account reverts to the parent. In fact, the parent who established the account may withdraw the funds, without any fiduciary duty to the child, at any time. Doing so will likely trigger an income tax liability, however.
I found these helpful tips at www.savingforcollege.com, a BankRate.com company:
Preserve your child’s financial future by taking these smart steps with your 529 plan account:
- Consider splitting the account. A 529 plan account has just one owner, which is fine when parents are together. However, when they split, each will have a separate stake in the child’s education.”If a 529 account stays with the husband, for example, the wife isn’t going to want to be funding that legacy account,” says Thompson. “Just as you divide your other marital assets, you’ll want to divide your 529.” It’s generally a relatively simple, administrative procedure to divide a single account into two accounts and that will give each parent control over a portion of the assets.
- Be sure your divorce decree specifies uses for 529 plan funds. If you’re worried that an irresponsible ex-spouse might siphon off 529 plan funds for things other than your child’s college education, you’ll want to set forth some clear language in your divorce decree, says Laurel Alberty, president of Alberty Financial Planning Services in Atlanta.”Make sure the decree specifies that funding can only be pulled for education,” she says. If a 529 plan withdrawal will result in a penalty of any kind, you may want to add language in the decree that makes it clear that both parties need to be informed of it or sign off on it.
- Ask for interested party statements. Just because a 529 plan account isn’t in your name doesn’t mean you can’t keep tabs on it. By requesting interested party statements from the financial institution of your 529 plan, you can make sure that your ex-spouse contributes regularly and doesn’t pull out funds without reason.Usually, you can request this service from the financial institution by filling out a few forms. “You should be able to get statements quarterly, and you can also be alerted if there are withdrawals,” says Linda Pietroburgo, a principal at the Moneta Group in Clayton, Mo.
- Be clear on successor owners. You may not be the owner of a 529 plan account, but you should be in line for it if something were to happen with your ex-spouse. “Parents are generally the best people to be successor owners,” says Pietroburgo. “If something happens, you at least want to know who will be controlling the money and that this person will have your child’s best interests at heart.”
- Lay out future funding. As time goes by, it’s not always clear to ex-spouses who will cover what with regard to educational expenses, says Thompson. Be sure to outline in advance how much each spouse will be responsible for covering higher educational costs — whether in percentages of the total cost or in dollars and cents — so that they can plan accordingly for 529 plan savings.