March 30, 2015
You have all heard the story:
“Boy meets girl. Boy and girl fall in love and get married. Boy and girl have a baby. Boy opens a 529 Plan to save for future college expenses of baby. Boy, girl, family and friends make contributions to baby’s account. Boy and girl have a fight. Girl files for divorce. Both forget to tell their lawyers about the 529 plan for baby. Divorce is finalized. Boy gets remarried to new girl. New girl threatens to leave boy unless he buys her a Porsche 911 Turbo. Boy does not have enough money. New girl finds a statement of boy’s 529 Plan. Afraid of going through another divorce, boy cashes out the 529 Plan and buys a Porsche. Baby applies for college and discovers there are no funds to pay for tuition. Baby takes out student loans, adding to the national $1.2 trillion in student debt. “
Well maybe the story you heard was a little different, but this is reality. So how do you prevent this from happening?
Don’t Forget! 529 Plans are Marital Assets
Many people incorrectly assume that a 529 Plan belongs to the child. Even though the child is the beneficiary, the money does not belong to the child; it belongs to the account owner (usually a parent). The account owner has complete control of the assets and has the power to: withdraw all funds for any purpose, change the beneficiary, change the successor owner, name a new account owner, and revoke a previously authorized agent.
Options for Divorcing Parents Owning 529 Plans
Make sure the Property Settlement Agreement specifically addresses the 529 Plan account funds and the Plan Administrator receives an executed copy. There are a number of ways to protect these college savings funds.
1. Split the Existing Plan Between Parents
Splitting a 529 Plan into two separate accounts will give each parent complete control over half of the assets in his/her individual 529 Plan account, with child as beneficiary on both accounts.
2. Provide Restrictions on the Account in the Property Settlement Agreement
The Property Settlement Agreement can restrict an owner’s powers on the 529 Plan account, such as: the inability to withdraw funds for non-qualified purposes; a limit on changing the beneficiary unless it is a sibling; designate the successor owner; limit investment options; give the age at which the beneficiary will become the owner; and state when withdrawals can be made.
3. Monitor the Account
Depending on the plan and state where the plan is held, parents may be able to monitor the use of the account by specifying that both parents need to be informed of any withdrawals. Pennsylvania Plans have options allowing for an interested party to receive quarterly account statements in addition to the owner. This option should be designated on the Plan itself, as well as in the Property Settlement Agreement. The Agreement should direct the Plan Administrator to send copies of the statements to both parents.
4. Give Authority to Another Individual to Act on the Account
Another way to restrict usage of the funds is to execute a Limited Power of Attorney, authorizing the non-owner parent to act on the account. Again, this should also be set forth in the Property Settlement Agreement.
5. Transfer Ownership of the Account
An owner of a Pennsylvania 529 Plan has the ability to change the owner of the account. This could be to the other parent, a third party, or to the beneficiary.
The moral of the story: Divorce can result in financial pandemonium, but don’t forget that the purpose behind funding the 529 Plan account was to provide for your child’s education. Regardless of the outcome of the divorce, try to keep the funds intact for the benefit of your child.
 Only one account owner is permitted. The parent becomes the owner, naming the child as the beneficiary.
 Anyone (parents, grandparents, the child, relatives, friends, etc.) can make contributions to a child’s account up to the contribution limit ($452,210 currently in Pennsylvania). The contributions are made with after-tax dollars, the earnings are tax-deferred while remaining in the account, and the withdrawals are tax exempt when used for “qualified education expenses”.
 The Treasury Department has projected that annual tuition costs for college education will increase approximately 34% over the next twenty years. This means that for a private four year college, tuition alone (housing, books, meal plans not included) will cost roughly $88,000 a year and for an Ivy League school, approximately $126,000 a year.
The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.