My husband and I set up 529 plans for our kids. What happens to those accounts with our divorce? Does it impact the plans at all? Is there anything we need to do?
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.
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 -
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.
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.