What Happens to a 529 Account During a Divorce?

 Posted on October 21, 2024 in Complex Property Divorces

Some parents set up a 529 college savings plan for their child or children. When these parents file for divorce, the question of which parent will be awarded the plan can arise. This is definitely a case of complex property division that requires knowledgeable legal assistance. Since there can be only one owner of a 529 account, careful planning, coordination, and cooperation between the parents is extremely important in this situation. When you choose a Fort Worth, TX family law attorney from The Law Office of J. Kevin Clark P.C., you can rest easy knowing that your attorney has experience handling the most complex property division issues.

What is a 529 Account and Who Owns the Account?

A 529 plan is an investment account that parents can take advantage of to pay for qualified education expenses. This type of account offers tax-free withdrawals and additional benefits when paying for these qualified education expenses, including college, K-12 tuition, student loan repayments, and even apprenticeship programs. If there are funds remaining, they can be used in several different ways, including funding a Roth IRA. There are two primary types of 529 plans:

• The Education Savings Plan is a tax-advantaged investment account designed specifically for saving for your child’s education. After-tax contributions are invested in mutual funds or similar investments, the fund goes up or down in value based on the performance of those investments.

• Prepaid Tuition Plans allow parents to prepay all or part of the costs for an in-state public college education. There is also a Private College 529 plan that applies to more than 250 private colleges.

Additionally, the state of Texas offers three types of 529 plans:

• The Texas College Savings Plan

• The LoneStar 529 Plan

•  Texas Tuition Promise Fund

 The account owner is usually a parent who controls the plan and makes decisions regarding contributions, investments, and withdrawals. While a child is the beneficiary of the plan, that child does not control the plan. Although the 529 account is considered a marital asset, there can be only one owner of the plan.

How Will My 529 Plan Be Divided During Divorce?

Although the 529 account is considered a marital asset in the state of Texas, the account owner – presumably one of the parents – has the power to change beneficiaries, withdraw funds, and manage investments. This level of control over a marital asset makes the division of this asset complex and can result in additional contentiousness during the divorce. 

Misuse of funds can lead to fund penalties, making addressing the ownership and usage of a 529 account during the divorce extremely important.  There may be negotiations regarding the management of the account, and the parents must reach an agreement regarding dividing the account (with a potential loss of tax benefits) or keeping it intact.  Some potential ways of handling a 529 account include:

• Divide the account into two separate accounts, one for each parent

• Freeze the account, which stops the ability to make deposits but ensures the account is only used for a child’s educational needs

• Stipulate how the funds will be used in the divorce agreement. Misuse of the funds by one parent can trigger court intervention

• Allow one parent to remain in control of the account while stipulating that the other parent receives regular updates

• Specify that if the parent-owner of the account passes, the other parent becomes the successor-owner

• Reach an agreement on how much each will continue to contribute to the account

• Make advance decisions about what will happen to any remaining money after the completion of the child’s education

Contact a Fort Worth, TX Complex Asset Division Lawyer

Some parents may be able to reach an agreement regarding a 529 account on their own; for others, a court order may be required. Including provisions for the 529 plan in the divorce agreement is necessary to prevent potential misuse. If you have questions about your 529 plan and how your divorce will affect it, an experienced Fort Worth, TX complex asset division attorney from The Law Office of J. Kevin Clark P.C. can help. Our firm is highly skilled in the division of complex assets and property disputes. Call 817-348-6723 to schedule your free consultation.