A lot of couples never consider what would happen to the college funds they set up for their kids if they were to divorce. This issue is usually addressed in a separation or divorce agreement, which stipulates how assets, including savings accounts, are divided between the spouses. They may prepare themselves for this by learning about how laws affect different types of accounts.
Funds that are put into 529 savings plans are considered completed gifts and are not part of the owners’ taxable estates. This account type is appealing because of its flexibility. However, it might give one spouse a financial advantage over the beneficiary. An ex-spouse, for instance, may change the beneficiary and remove assets, sit on the money or terminate the account. A divorce agreement needs to specify that the assets only be used in the beneficiary’s interest.
Coverdell Education Savings Accounts are similar. The difference, however, is that the beneficiary must receive the assets within 30 days after the individual’s 30th birthday, and the funds can be transferred following a divorce.
Assets in savings bonds are easier to deal with during a divorce. The owners can return them to the Treasury to have them divided and reissued according to the divorce agreement. For a traditional or Roth IRA, only the portion accumulated in the account during the marriage is subject to asset division. A Custodial 529 or UGMA/UTMA account protects college funds because it does not allow the owner to change the beneficiary. Deposited funds are considered completed gifts, and the beneficiary may take ownership upon reaching the age of majority.
There are numerous other options for saving for a child’s college, such as trusts. Couples could discuss these with their attorneys to determine which options are best for their needs. Attorneys may also discuss other aspects of divorce so that their clients will know what to expect.