“529 Savings Plans” are a popular way for parents to save for their kids’ college education. Under these plans, parents can open an investment account to save money for tuition, fees, room and board and, in most states, the investment gains are tax-free as long as the money is ultimately used for college. But how is that money treated if the parents get divorced?
A recently decided North Carolina case tells us how that question is handled in at least one state.
In that case, a couple created 529 plans for all six of their kids using money that the father was earning as the family’s sole breadwinner. However, the mother was named as plan participant and owner of the accounts.
The couple divorced in 2014 and, in 2017, the court divided their assets unequally, giving the mother 57 percent of the estate, including the home and the 529 plans, assuming she’d use the plans to pay for the kids’ college educations.
But the father challenged the decision. He argued on appeal that the 529 plans should be “carved out” of the marital estate and should not be part of the calculus when dividing their property. Specifically, he argued that the plans should be considered a gift to the kids.
The state appellate court disagreed with the father, ruling that because the children didn’t legally possess the plans, the plans couldn’t be considered a gift to them. Though it was expected that the mother would use the money for the kids’ college, she could, in theory, opt to use it on something else after paying a tax penalty. Thus, the court said, it made sense to allocate the plans to the mother, as plan custodian.
This decision, however, only applies in North Carolina. Courts in other states may handle the issue differently, so it’s a good idea to talk to a lawyer where you live to find out what you might expect should this issue arise.