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Ex's in-laws can pull plug on 529 plan
My in-laws had a 529 plan for my daughter. We are getting a divorce and they aren't being generous to their grandchildren anymore. They said they took the money out of her 529 plan. Is she still entitled to that money or can they take it back?
I'm sorry to have to tell you that your daughter has no claim to any of the money taken from the 529 plan. Your in-laws were the account owners, and they held all the rights, including the right to withdraw the 529 funds for themselves. It makes no difference that your daughter was named as beneficiary on the account.
Most parents and grandparents appreciate the fact that 529 plans permit them to retain ownership and control of their contributions. This stands in stark contrast to a Uniform Transfers to Minors Act, or UTMA, account to which gifts are irrevocable. UTMA assets must be transferred to the child's direct ownership at age 18 or 21. While you hope, and perhaps expect, that your child will decide to spend their money on a college degree or in some other productive way, no one can prevent her from using it to chase the world poker championship.
Anyone putting money into a 529 plan does not have to worry about the beneficiary squandering it. An added advantage for grandparents and others concerned with estate planning is that the 529 plan is generally not considered to be part of their gross estate for tax purposes.
The level of control afforded by a 529 plan helps also when it comes to applying for federal financial aid. The 529 account is considered an asset of the account owner, not the student. If the account owner is the parent, it is assessed on a sliding scale that caps out at 5.64 percent of its value. A grandparent-owned 529 is even better; it is not counted at all. UTMAs, on the other hand, are considered student-owned assets and are assessed at a high 35-percent rate.
The decision by your daughter's grandparents to liquidate their 529 plan without using the funds for your daughter's college education means they will be subject to income tax and a 10-percent penalty on any earnings that have built up in their account. It also means they have pulled these assets back into their taxable estates.
They could have avoided or delayed those consequences simply by holding on to their 529 account and deciding later on to either liquidate it, change the beneficiary to another family member (only certain members will qualify), or use it as originally intended for your daughter's college education. In fact, there's a chance they still have their 529 plan, in spite of what they told you, and will ultimately decide to use it to help their granddaughter obtain her college degree.
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