Divorcing? How to Protect Your Child’s College Funds
Recently, I was quoted in a Reuters article which showcased various ways that families save funds for their children to attend college. Sometimes in my work as a Certified Financial Planner®, I use the example of divorce as a way to communicate one of the best reasons to hold funds in a 529 college savings plan. Oftentimes, when a divorce occurs, any nebulous chunk of cash that’s been commingled with other savings is one of the first to be diverted from its initial purpose—for example, college.
Statistics provided by Fidelity show that a record high 72% of families are saving for college, but only 42% hold those savings in a specific, segregated fund. A 529 plan is a savings account that can be considered an asset of the marriage because it’s funded by the familial community—both spouses, or even other family members like grandparents. Unlike other marital assets, because a 529 plan is earmarked, both parents usually feel it’s not a candidate for division.
A 529 plan has 1 owner (usually a parent or grandparent); a beneficiary (the child who would attend college); and a successor (responsible for the funds if the original owner dies). The owner could be the husband; the successor, his wife. Thus in a divorce, the owner has full control over this asset.
However, I have seen less-than-scrupulous parents drain 529 accounts. 3 tips to keep college funds from being usurped:
- The marital settlement agreement needs to clearly state that the 529 plan will only be used for a specific beneficiary, with explicit instructions that identify what circumstances permit withdrawals;
- Identify the successor owner in case of death; and
- Opt to receive statements if you are not the owner in order to keep track of activity, and ensure that no one is dipping into the funds.
No one thinks that divorce will happen to them, but as they say, “you never know.” It is important to plan ahead and protect your child’s future. If you clearly earmark funds for college in the settlement agreement with a 529 plan in place, you could save yourself from big, expensive disputes over the ultimate purpose of the funds in divorce negotiations. As I said in the Reuters article, “When there is a 529 plan, nobody ever thinks of invading that, it is sacrosanct.”
Contact me today with questions regarding children’s assets in divorce or to get started with a 529 plan for your child’s college savings.