For many Colorado parents, setting aside money to fund their child’s education is a top priority. A great resource for college savings are 529 plans, which are incredibly flexible accounts. They allow parents to build savings that their children can use for higher education. When a family goes through divorce, however, it is important to remember that these accounts are assets, and need to be treated accordingly. Without proper planning, it is possible that these savings may not be used for their intended purpose.
In most cases, the parent who will retain primary physical and legal custody of a child will also become the “owner” of that child’s 529 plan. When everything goes according to plan, the funds that have been set aside for college are used for that purpose, and the child benefits from the generosity of his or her parents. However, there are circumstances in which a 529 plan can be put to a different use, one that was never intended.
For example, consider a parent who, after a divorce, goes on to remarry. If his or her partner has children from a previous relationship, it is possible for the owner of a 529 plan to change the beneficiary from his or her own child to a stepchild. This can leave the child for whom the 529 plan was established with little to no savings to draw upon when the time comes to head off to college.
The best way to address this issue, like so many other divorce matters, is to discuss the disposition of an existing 529 plan during the negotiation process. It is possible to take the savings placed within the account and divide them into two separate 529 accounts, which gives both parents a measure of control over the funds. Another option is to establish an education trust, which can help ensure that the intended beneficiary is the only party who will be able to access the funds. Each Colorado family will have a unique solution to this problem, but it is important to have a discussion before a divorce settlement has been reached.
Source: Forbes, “How To Protect Your College Savings During A Divorce“, Brian Boswell, Aug. 28, 2016