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How to make sure divorce doesn't disrupt a 529 plan
Erin Peterson is a freelance writer based in Minneapolis.
There's no question that divorce often results in financial chaos, and as couples seek to untangle their financial lives from one another, a 529 plan often gets neglected.
Though the funds inside a 529 plan can be significant, they may be overlooked because people assume the money belongs to the child, says Leslie Thompson, a Chartered Financial Analyst at Spectrum Management Group in Indianapolis.
"People often see a 529 as their child's asset, but it's an asset of the marriage, and that means it really needs to be planned for as a part of the divorce," she says. Indeed, missteps can be costly. Without careful planning, an ex-spouse could potentially drain the account, leaving your child with fewer options for his or her college education.
Protecting your child's future
Preserve your child's financial future by taking these smart steps with your 529 plan account:
Consider splitting the account. A 529 plan account has just one owner, which is fine when parents are together. However, when they split, each will have a separate stake in the child's education.
"If a 529 account stays with the husband, for example, the wife isn't going to want to be funding that legacy account," says Thompson. "Just as you divide your other marital assets, you'll want to divide your 529." It's generally a relatively simple, administrative procedure to divide a single account into two accounts and that will give each parent control over a portion of the assets.
Be sure your divorce decree specifies uses for 529 plan funds. If you're worried that an irresponsible ex-spouse might siphon off 529 plan funds for things other than your child's college education, you'll want to set forth some clear language in your divorce decree, says Laurel Alberty, president of Alberty Financial Planning Services in Atlanta.
"Make sure the decree specifies that funding can only be pulled for education," she says. If a 529 plan withdrawal will result in a penalty of any kind, you may want to add language in the decree that makes it clear that both parties need to be informed of it or sign off on it.
Ask for interested party statements. Just because a 529 plan account isn't in your name doesn't mean you can't keep tabs on it. By requesting interested party statements from the financial institution of your 529 plan, you can make sure that your ex-spouse contributes regularly and doesn't pull out funds without reason.
Usually, you can request this service from the financial institution by filling out a few forms. "You should be able to get statements quarterly, and you can also be alerted if there are withdrawals," says Linda Pietroburgo, a principal at the Moneta Group in Clayton, Mo.
Be clear on successor owners. You may not be the owner of a 529 plan account, but you should be in line for it if something were to happen with your ex-spouse. "Parents are generally the best people to be successor owners," says Pietroburgo. "If something happens, you at least want to know who will be controlling the money and that this person will have your child's best interests at heart."
Lay out future funding. As time goes by, it's not always clear to ex-spouses who will cover what with regard to educational expenses, says Thompson. Be sure to outline in advance how much each spouse will be responsible for covering higher educational costs -- whether in percentages of the total cost or in dollars and cents -- so that they can plan accordingly for 529 plan savings.
Posted July 16, 2010