Answers in Divorce Financial Planning

The rules are prescribed by the plan administrator. To provide for the efficient functioning of a pension plan, funds need to be managed in a way consistent with the preservation of the money to be there when it is needed based on actuarial assumptions. All of this essentially means that the plan needs to conserve the funds now to be there for the longer-term needs of participants and their beneficiaries. Unfortunately, you are subject to the cruel impact of bad timing in that your ex-spouse is not old enough to claim his benefit and your need is immediate.

You may want to discuss with an attorney any options that you may have for modification to your divorce settlement.

Your situation raises the important point that it is important to go over and prepare for the financial impact of divorce before finalizing a settlement. Health insurance is an important issue that needs to be reviewed early on. And for retirement plans folks really need to have their Qualified Domestic Relations Orders (QDROs) reviewed by an administrator before the ink is dry.

In reality, there is nothing that you need to do short of updating the address of the owner of record with the 529 plan administrator. In the divorce financial planning part of my practice, I will consider these assets to be for the kids and not part of the marital assets. But I think it prudent to include a college funding plan as part of this divorce analysis. Divorce will have a potential impact on financial aid as well so this should be part of the discussion to help plan now to avoid the surprises later.

The plans should not be impacted. Although one of the parents is most likely the owner, we consider 529 assets to be property of the children and do not include them in the divorce process other than to note them and address any questions the couple may have.

I feel the best thing to do is to have a more detailed conversation about the children’s higher education costs as part of the divorce process. Who will be responsible for any additional costs above the 529 plan proceeds?

When building a budget for the couple moving forward, this is an important expense that can be overlooked. This consideration gains added significance if college is in the near future. It is best to discuss this now rather than deal with surprises in the future.

Isla,

There should be no "required" impact on the plans, other than possibly changing who is the account owner, and then only if there is bartering going on between the spouses on the facts about how education will be paid for in the future.

Since the child is the beneficiary of the plan, the plan itself doesn't need to change - and in reality the plans should not be considered by the couple as assets to be divided (since they belong to the child ultimately, not the parent).

However, it's likely in everyone's best interests to include the 529 plans in property division, as well as assigning responsibility for future education expenses for the kids. All situations will vary, but if (for example) there was a 50/50 division and three children, each with a 529 plan, the division could go something like this:

(assumes each 529 plan is equal in value)

Child A 529 plan ownership to Spouse A

Child B 529 plan ownership to Spouse B

Child C 529 plan ownership to Spouse A

Joint savings account of value equivalent to Child C 529 plan to Spouse B

Responsibility for education expenses for Child A, Child B, and Child C is divided 50/50 between Spouse A and Spouse B from whatever sources they choose to use.

Naturally, other division examples could be used, but this simple illustration might help your understanding.

Hope this helps -

jb

529 plans can only have one adult "account owner" and one beneficiary for whom the plan assets are designed to help pay for qualified educational expenses. However, since the account owner can withdraw funds from the plan at any time (even though there are penalties and taxes), I think most divorce proceedings would view this as an asset of whichever spouse is serving as the account owner.

As a result, when going through a divorce and working towards an equitable division of assets, 529 plans will likely be considered a marital asset and should be addressed when discussing how future education funding will be handled for the children.

You can go through a divorce and leave the 529 plan in tact, but the account owner does control the assets in the plan and this needs to be accounted for when making decisions about the division of assets and the assignment of responsibility for future educational costs.

Wyatt. Although your question involves finances, the answers lie within the legal community. Therefore, I recommend seeking the advice of legal counsel in this situation.
I will share some considerations I would ask if I were consulting with you during our divorce process. Was the debt originated in joint name or individually? That will likely make a difference. Was the debt accumulated while you were married vs. originated prior to your marriage? I did not see a mention of your location. If you live in a community property state, you may be subject to a portion of the debt incurred during the marriage – even if it were solely in your wife’s name.
On a positive note, if you and your wife are willing to work together during your divorce process, you may find a solution that works for both of you. As an example, a good credit rating may be more important to you than to her. Buying a new house in the near future is an example of the importance of a good credit score. If this is the case, you may create a solution (based on your local laws) in which she receives a significant portion of the debt and files bankruptcy. Most likely, there would be some assets to offset the debt.
When consulting couples through divorce, the point I share with all couples is…”it was your marriage, it should be your divorce”. If possible, work together to find a solution that you can both live with. Beware of making bad financial decisions in what is often an emotionally charged process. Be sure to understand the consequences – now and in the future – prior to signing the decree. By the way, the consequences include more than finances, especially if children are involved. Good luck. Let me know if I can be of further assistance.

Bonnie - Depending on the timing of your divorce and your ex-husband's employer health coverage, you may be eligible for COBRA health insurance coverage for a period of up to 3 years following your divorce. This assumes your husband had health insurance through his employer and his company had more than 20 employees.

COBRA coverage isn't cheap, but it's better than no coverage at all.

Regarding the pension, you should contact the plan sponsor (your ex-husband's employer) and try to speak to someone in Human Resources or the benefits department. Each company and pension plan is different, but they may allow you to take your part of his pension earlier, though it would likely be at a reduced amount. If you haven't looked into this already, it would be worth making some calls and confirming what your alternatives are, if any.