Parents, and sometimes grandparents, plan for education expenses by setting aside money in advance. They may mentally or literally earmark funds for one or more children, hoping that investing now will make it easier to pay for college or other training in the future. How they organize their savings plan determines who owns those accounts when parents divorce.
The New Jersey Better Education Savings Trust is the formal title for our 529 College Savings Plans. A 529 college savings plan is a tax-advantaged investment plan created to encourage saving for the future higher education expenses of a designated beneficiary. Although the features vary somewhat from state to state, the general premise is that 529 Plans permit savings for college education expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options include stock mutual funds, bond mutual funds, and money market funds.
When parents stay together, those funds can generally be used at any accredited college or university and the account holder does not pay taxes on the increased value of the original investment. When parents divorce, they may not agree on whether to divide the 529 savings, how to continue investments, or how to use those funds in the future.
It surprises many parents to learn that the named account holder – the adult, not the child – of a 529 account retains ownership of the contents. Their assumption that their intention to create savings for a child means that the money belongs to that child and that it is protected or exempt from equitable distribution is incorrect. In a divorce, a 529 account should be divided between the parties as part of equitable distribution of all assets, although they can agree otherwise. If grandparents or anyone other than the divorcing parents hold the accounts, it is not a marital asset at all. The criteria for dividing a 529 account and for negotiating how the funds may be used in the future must be discussed with your divorce attorney. In a nutshell, dividing the account equally does not mean that parents in different economic situations must pay for school costs equally. The parents' total ability to pay matters, including their salaries, 529 funds, and other savings.
Marital savings do not include accounts account formed under the Uniform Trust for Minors Act (UTMA) or Uniform Gift to Minor Act (UGMA in other states). Those savings accounts belong to the child, even though an adult is named as the “trustee” or “custodian” of the account. Deposits become irrevocable gifts to the child and parents should not assume that those funds are available to help the parents cover education costs.
We advise listing all the 529, UTMA and other educational savings accounts, or children’s accounts on your Case Information Statement, even if you are not the account holder and do not know the value of the accounts. By identifying what does, or might, exist for future school expenses for your children, we can start a discussion about assets that, although technically eligible for equitable distribution, you might want to mark as “exempt” in the Asset Section of the Case Information Statement or otherwise annotate to reflect those special discussions should be had about assets that belong to children or which are intended to be set aside for their benefit.
If you have questions about investing in a 529 account or the tax laws that affect you, please contact your investment advisor or alert your divorce lawyer so that we can help you get the correct financial advice.
If you have questions about how to protect your rights to a marital asset that happens to be a 529 account, or how to make sure your children’s assets are secured in a divorce, talk to the family law team at Cohn Lifland.