Treatment of 529 Plans in Virginia Divorce
A 529 plan is an education savings account that parents may set up to pay their children’s future college education costs. Otherwise known as a “Qualified Tuition Program” in the Internal Revenue Code, 529 plans are typically established through individual states or educational institutions and provide a variety of benefits. The primary benefit is that earnings derived from the investment of a 529 plan are not subject to federal taxation when used to pay college education costs. Unlike 401k accounts, however, the contributions to a 529 plan are not excluded from taxation, and there is no third party “matching” of funds.
To set up a 529 plan, you need one custodian (also known as the account holder), one beneficiary, and a plan administrator to invest the contributions. Parents who set up a 529 plan for their child can do so in only one of their names. Notably, ownership of the 529 plan remains 100% in the hands of the custodian rather than the beneficiary. This means that the custodian may withdraw funds from the 529 plan at any time without a penny ever going to the beneficiary’s college education costs (although additional penalties may result).
So how are 529 plans typically treated in divorce? In Virginia, a 529 plan will likely be considered a marital asset. Because only one party is the custodian of the 529 plan and the other party is not, divorcing parties are presented with a choice. They may choose to divide an existing 529 plan into two 529 plans with the same beneficiary, or, in the alternative, they may agree that one party (the custodian) will continue to hold the 529 plan for the sole benefit of their child.
But what about the risk of the custodian withdrawing the funds before the child receives his or her intended benefit? It is important that divorcing parties who agree to keep a 529 plan intact take the precaution of specifying the intended use of those funds in a property settlement agreement. A properly worded settlement agreement can prevent the custodian from reclaiming the 529 plan funds for his or her own personal use down the line.
The divorce lawyers at Livesay & Myers, P.C. have years of experience in the drafting, negotiation and review of property settlement agreements. If you are facing a divorce in Northern Virginia and have a 529 plan, contact us to schedule a consultation today. We can help you understand your options and ensure that your interests—and your children’s interests—are protected.