As college tuition and related expenses continue to increase, many parents use 529 plans to save for their children’s education. These accounts offer important tax benefits: contributions may grow tax-deferred, and distributions are generally exempt from federal income tax when used for qualified educational expenses.
A 529 plan, however, does not function like an irrevocable trust. The child is usually the account’s beneficiary, while the person who opened the account remains its legal owner. That distinction becomes especially important when parents divorce.
For a broader discussion of ownership, marital classification, distributions, beneficiary changes, and unused funds, read our article explaining what happens to a 529 college savings plan in divorce.
Good Intentions May Not Be Enough
Parents often describe a 529 plan as money that “belongs to the child.” Legally, however, the beneficiary usually does not own or control the account.
The account owner may have authority to:
- Select the investments
- Request distributions
- Change the beneficiary
- Transfer or roll over funds
- Name a successor owner
- Close the account
The owner may also be able to request a nonqualified withdrawal. Such a withdrawal can produce federal and state tax consequences, including potential taxation and an additional federal tax on the earnings portion. It may also violate a divorce judgment or settlement agreement.
This means that simply awarding a 529 plan to one parent “for the child” may not adequately protect it. The divorce documents should contain clear and enforceable terms governing how the account will be managed.
Restricting Withdrawals From the Account
A divorce agreement can specify that 529 funds may be used only for the designated child’s qualified educational expenses.
Depending on the family’s goals, the agreement might prohibit the account owner from:
- Taking nonqualified distributions
- Borrowing from the account
- Using the money for personal expenses
- Changing the beneficiary
- Transferring funds to another educational account
- Pledging or assigning the account
- Closing the account without written consent or a court order
The agreement can also explain what happens if the owner violates those restrictions. Potential remedies may include restoring the withdrawn money, paying resulting taxes or penalties, reimbursing the other parent, or paying enforcement-related attorney’s fees when permitted by law.
A vague statement that the account is “intended for college” may not provide the same protection as specific restrictions and remedies.
Giving Both Parents Access to Account Information
When one parent remains the account owner, the other parent may reasonably want information about the account’s balance, investments, and distributions.
Depending on the plan, the non-owner parent may be able to receive duplicate statements, interested-party notices, or limited online access. If the plan does not provide those options, the divorce agreement can require the owner to produce regular statements.
The agreement may require disclosure of:
- Quarterly or annual account statements
- Contribution histories
- Distribution records
- Investment changes
- Beneficiary changes
- Tax forms
- Notices from the plan administrator
- Documentation showing how withdrawals were spent
Regular disclosure can identify a problem before the child begins college and discovers that anticipated funds are no longer available.
Defining Which Educational Expenses May Be Paid
The phrase “college expenses” can mean different things to different people. One parent may believe the 529 plan should cover only tuition, while the other expects it to pay for housing, meals, books, computers, transportation, and other costs.
The agreement should specify which expenses may be paid from the account. It should also address whether the parents intend to limit distributions to expenses treated as qualified under current tax law.
Potential expenses may include:
- Tuition
- Mandatory fees
- Books and supplies
- Required equipment
- Computers and internet access
- Qualifying room and board
- Vocational or apprenticeship expenses
- Other expenses allowed under applicable tax law
Because tax rules can change, parents may want to require consultation with the plan administrator or a qualified tax professional before making an uncertain distribution. Divorce and educational planning can also raise other important tax issues.
Deciding When the 529 Funds Will Be Used
Parents should decide whether 529 funds will be used before or after applying scholarships, grants, loans, and parental contributions.
For example, an agreement might provide the following order:
- Scholarships, grants, and other nonrepayable financial aid
- Available 529 funds
- The child’s agreed contribution
- The parents’ remaining contributions in stated shares
Another family may prefer to preserve part of the account for graduate school or divide expenses between the account and the parents each semester.
There is no single correct arrangement. The important point is to decide these questions before tuition becomes due.
Addressing Future Contributions
The parents should also specify whether either parent must continue contributing to the 529 plan after divorce.
Questions may include:
- Will contributions be mandatory or voluntary?
- How much will each parent contribute?
- When are contributions due?
- Will contributions be proportional to income?
- Can contributions replace part of another educational obligation?
- Who receives any available tax deduction or credit?
- What records must be exchanged?
A parent should not assume that voluntary contributions to a 529 account will reduce an existing child support obligation. Child support and college savings are usually separate issues unless the court order expressly provides otherwise.
Naming a Successor Owner
The account owner may die or become incapacitated before the child completes school. The plan documents and divorce agreement should therefore address successor ownership.
The parents may agree to name:
- The other parent
- A trusted relative
- A designated fiduciary
- Another person committed to preserving the account for the child
Failing to designate a successor may cause the account to pass under default plan rules that do not reflect the parents’ intentions.
Planning for Unused Funds
Not every child uses the entire 529 balance. A child may receive a scholarship, attend a lower-cost institution, complete school early, or decide not to pursue additional education.
The divorce agreement should explain what happens to unused funds. Depending on current law and plan rules, possible options may include:
- Keeping the account available for the child’s future education
- Using it for graduate or professional school
- Changing the beneficiary to a sibling or another qualifying family member
- Applying it to an eligible apprenticeship
- Using qualifying funds for certain student loan payments
- Completing an eligible rollover to the beneficiary’s Roth IRA
- Dividing the remaining value between the parents
- Taking a nonqualified distribution and allocating the resulting taxes and penalties
Without an agreement, the account owner may retain substantial discretion over these decisions.
Higher Education and Child Support in Missouri
Missouri law can extend child support beyond a child’s eighteenth birthday when the child timely enrolls in and attends a qualifying vocational or higher education program and satisfies the statutory requirements.
These requirements can involve enrollment deadlines, minimum credit hours, academic performance, and the exchange of enrollment and grade information. The complete provisions appear in R.S.Mo. § 452.340.
A 529 plan does not replace these statutory requirements or automatically determine which parent pays a particular college expense. Parents negotiating a divorce may still need to address:
- Tuition and fees
- Housing and meal plans
- Books and supplies
- Transportation
- Health insurance
- Scholarships and financial aid
- The child’s expected contribution
- Limits on the institution or amount covered
Our page concerning college education and child support provides additional information.
Put the Educational Plan in Writing
Parents may agree during divorce that every dollar in a 529 plan will be preserved for their child. Years later, financial circumstances, relationships, and educational plans can change.
A detailed written agreement can reduce uncertainty by addressing:
- Ownership and control
- Permitted withdrawals
- Beneficiary changes
- Account statements
- Future contributions
- Qualified expenses
- The order in which expenses will be paid
- Successor ownership
- Unused funds
- Taxes and penalties
- Remedies for violating the agreement
These issues may be resolved through negotiation, mediation, or collaborative divorce. If the parents cannot agree, the court may need to determine how the account is treated under the governing law.
Speak With a Family Law Attorney About Educational Savings
Protecting a child’s education requires more than identifying a 529 account on a property statement. The final divorce documents should explain who controls the account, how the money may be used, and what protections apply after the marriage ends.
The attorneys at Stange Law Firm, PC understand the financial issues that can arise when dividing property and planning for a child’s education. Contact Stange Law Firm online or call 855-805-0595 to schedule a confidential consultation.
