Can Divorce Affect College Education Savings for Your Child?
When you begin saving money for your child’s college education, divorce is likely the furthest thing from your mind. However, if you do decide to divorce, there is a chance that the funds will be subject to property division. How can you ensure that the money you have saved for your child will indeed be used for its intended purpose? This question must be addressed in your separation agreement.
Parents who wish to save for their child’s education may do so by investing in a tax-deferred 529 College Savings Plan or a Custodial account. Depending on the type of account, or more specifically, who owns the account, the money may or may not be protected from asset division at divorce.
Who Owns College Savings Accounts?
Custodial accounts are established at financial institutions for the benefit of a minor child. These accounts belong to the child, with a parent named as the custodian. In other words, the parent(s) make an irrevocable gift to the child for funding his or her education. Because the money is a gift to the child which the child now owns, the money will not be subject to division should the parents divorce.
A 529 College Savings Plan, on the other hand, is opened in a parent’s name on behalf of his or her child. Because the money is owned by the parents and not distributed to the child until he or she begins college, this type of account is subject to division at divorce.
How 529 Accounts are Handled During Divorce
If you and your spouse opened a 529 account, you will need to decide who will take ownership of the account after divorce, or decide on another option such as splitting the account. It is important that you come to a mutual agreement on this matter, as whoever becomes the sole owner will be the only person who can make decisions about how the funds are used.
In many cases, it may be in your best interest for the non-custodial parent to take control of the account because the non-custodial parent’s income and assets are not included on the FAFSA, which means that the student may qualify for more financial aid.
If you decide to split the account, both you and your ex-spouse will be able to continue making contributions to your child’s college fund without having to worry that your ex-spouse will close the account or take your money. There are no penalties or fees to go this route.