Most couples after they have children immediately begin saving for college, given that college will cost upwards of $250,000 per child by the time those children begin college. But what these same couples do not often anticipate is the control of those funds in the event of divorce. Will the money still be available for college? It depends on the nature of the accounts and the agreements, if any, of the parties.
Parents can save for college in generally two ways – retirement accounts, like an IRA, or specialized college accounts known as 529 plans. Courts treat the accounts differently.
An IRA is considered marital property to be divided among the parties. So, if a couple saves $100,000 in an IRA for college, in the name of one or both parties, it is no different than a retirement account intended for retirement. The court will divide the proceeds and the parties may do as they wish with the funds. In this sense, the parties have no guarantee the money they saved during marriage will go to paying for college.
The 529 Plan is specifically designed for college savings and has both tax advantages for savings and no tax on withdrawals if used for paying for college expenses. But if the account is opened in the name of one parent only, that account owner retains control over the account, including who will be the beneficiary. If the account is in both names (not always possible for these accounts), the parents have more control, but not necessarily a veto over a withdrawal.
A 529 Plan is not considered marital property but rather a gift to the beneficiary. The problem, however, is that without an agreement on the beneficiary, a spouse could change that beneficiary and remove the funds.
So, if a 529 Plan is the most advantageous way to save, how can spouses protect the funds in the event of a divorce?
First, the spouses should create a 529 Plan under the Uniform Gift to Minors Act (UGMA), which locks in the child beneficiary at the creation. All deposited sums remain for the sole benefit and use of the minor beneficiary who, upon attaining majority, would have exclusive control over the funds.
Second, the spouses could create a trust for the benefit of the child with the exclusive purpose the college expenses of the beneficiary. The trust could be drafted in a way that should the child not attend college, the funds would still be available to the child and not a parent. The trust would have to be carefully drafted to secure the same tax advantages of a 529 Plan.
Third, the spouses can enter an antenuptial or postnuptial agreement, whereby they simply agree that whatever savings account they set up for the college expenses of a child shall remain for the exclusive benefit of that child to pay for college. If the child does not attend college, the parties can agree how they want to divide the funds.
The worst possible option would be to create a savings plan without any protection for the beneficiary child, as that leaves the account open to distribution by the court or being emptied beforehand by a spouse.
If you have questions about college savings and divorce, contact us – we can help.