Preserving the integrity of college savings plans in divorce

There are several methods and places to save college funds to ensure their growth and survival for their intended beneficiaries, your children. When we draft divorce property settlement and separation agreements, there are important provisions included to protect and preserve the integrity of college savings plans.

When you get divorced in Texas, a community property state, property you and your spouse acquired during the marriage is divided. If an account holds cash, it is easy to divide the money. If a home is sold, the net proceeds of the sale can be split. Things get more difficult, however, when there is an intended beneficiary involved, such as a child planning on college in the future. Many parents going through divorce are concerned with protecting the money set aside in college savings accounts. Nobody wants to tell their son or daughter they cannot go to college because the money was spent on an equalization payment. In another scenario, what happens if the college funds are secured and the former spouse with access and control of the college funds becomes remarried to someone who may also have children who need college money? What if anything can be done to prevent another person from misusing earmarked college funds, especially long after the divorce is final?

Unless otherwise ordered by the court, most community property is divided by the parties in a separation or settlement agreement that becomes incorporated into the divorce judgment. In addressing college savings funds and accounts it is vital that these investments are identified and classified correctly, so as to preserve them and not allow the funds to be otherwise dispersed into the community estate before division.

There are several methods and places to save college funds to ensure their growth and survival for their intended beneficiaries, your children.

1. 529 College Savings Plans

Authorized by Section 529 of the Internal Revenue Code, a 529 plan is qualified tuition plan sponsored by states, state agencies and education institutions. In a divorce, the assets in a 529 plan are considered a completed gift to another and are not part of the community estate. Beware, while these plans are not divisible in the divorce, the beneficiary of the plan could be changed, or the account could be revoked. Therefore, it is absolutely necessary to use caution when drafting agreements to include language to preserve the integrity of the account for the intended beneficiary.

2. Custodial UTMA Accounts

The Uniform Transfer to Minors Account (UTMA) account is irrevocable and the donor cannot recapture the funds by revoking the account and they cannot direct them to another third party. This protects against a college savings plan going to your spouse and funding anyone other than the children you identify when establishing the UTMA account. Because the UTMA account cannot be usurped by another who is not the named beneficiary, these college savings accounts provide additional security.

3. Coverdell Education Savings Accounts

An education savings account used to be known as an educational individual retirement account. The Coverdell is another IRS qualified education expenses savings account with a designated beneficiary. Coverdell ESAs are similar to 529 accounts where the assets are held separately for the student beneficiary. Coverdell accounts received in divorce settlements are not taxable. With any of these college savings accounts, taxation is an important consideration. Also like the standard 529 plan, the owner may change the beneficiary designation so protective conditional language may be necessary to provide assurances.

When we draft divorce property settlement and separation agreements, there are important provisions included to protect and preserve the integrity of college savings plans.

Who will be qualified to make a withdrawal from the account for the student’s benefit and to fund their education and expenses? What expenses will be qualified? What happens if there is an emergency and there needs to be a non-qualified withdrawal of funds?

The regulation and management of college funds and plans must be appropriately addressed in a divorce and in any and all agreements that can impact your son or daughter’s right to use and enjoy the full benefit of the college savings as originally intended. At Scroggins Law Group, we work with families in transition and pay close attention to assuring the financial needs of children and their education are secured.

Dallas, Denton and Collin County Board Certified divorce and family law attorney,
Mark Scroggins , along with their team at
Scroggins Law Group represent clients in a variety of divorce and family law matters.

At Scroggins Law Group, our Dallas, Denton and Collin County divorce attorneys have more than over 24 years of collective experience with family law cases. When you retain our firm, you can trust that your case is in the hands of a highly skilled, dedicated professional. we understand the unique challenges of a high value divorce case, and more importantly, have the knowledge and experience you need on your side. Call us today, (214) 469-3100, to learn more about Texas divorce and family law.