If you’ve managed to start a 529 college savings account, pat yourself on the back. You’ll be glad you set one up — and you’re lucky you have money to spare, since plenty of people don’t.
But each of these accounts can involve up to four people: the account owner, the spouse of that owner, the beneficiary and the successor. And if you don’t understand what that means or how it works, it can create big trouble if a marriage breaks up or someone dies.
Here’s what you need to know.
The Four Parties
When you open a 529 account, you become the “account owner.” There is generally just one owner, and that person is the first interested party in our analysis. Mark Chapleau, a lawyer and 529 expert, points to the rules that ushered the accounts into existence decades ago and that describe one person or entity as an eligible account holder.
Why not joint owners, say a married couple or multiple grandparents? That could make assigning taxes and penalties difficult if those owners didn’t follow the rules that give 529 accounts their tax advantages.
But the single account owner setup can create uncertainty for a second parent — that’s the second potential interested party here — which we’ll get to in a moment when we discuss divorce.
Then there’s the third person in the mix, the “beneficiary.” That’s the person who is supposed to end up getting the education. You can swap one beneficiary for another along the way.
Finally, there’s the “successor,” our fourth party. A successor becomes the account owner if the original owner dies.
How to Handle a Divorce
In the event of a divorce, you’ll hopefully end up with a settlement, as opposed to making a judge decide what will become of your various financial accounts.
Part of that settlement may involve determining who will pay (and save) what for college. And when you have that discussion, you’ll hopefully discuss existing 529 accounts.
This doesn’t always happen, though. Make sure to discuss it with any lawyer or mediator.
The “only one account owner” situation can pose challenges if divorcing couples don’t trust each other. One solution could be to split the 529 accounts, so that each parent can oversee a portion of the money. Another could be to give account statements on a regular schedule to the parent who’s not the owner, so that parent knows that the ex is not making off with the money or investing it in a suboptimal manner.
Alan Feigenbaum, a matrimonial and family law attorney with Blank Rome in New York, generally has several questions on his 529 checklist.
When it comes time to pay for college, does the couple intend to exhaust the 529 account before making any additional payments to educational institutions? If there’s money left over in an account, what happens to it?
He also sees situations where soon-to-be former spouses are aware of 529 accounts that the ex’s relatives have opened. How do those accounts fit into any settlement agreement, if at all?
Leila Francis, national head of fiduciary advisory services at BMO Wealth Management, has a rooting interest in these issues. She’s divorced, an estate-planning lawyer and a parent with a couple of 529s.
One of her concerns is the situation where an account owner gets divorced, remarries, has more children and tries to use 529 money from the first marriage for the children in the second one. You can try to head that off in a divorce agreement as well.
You may not be able to account for every eventuality, though, including the possibility that the account owner becomes estranged from the beneficiaries years after setting up the 529 plans.
“You can have a wonderful divorce decree that says what is supposed to happen,” Ms. Francis said. “But then you have to take your ex to court to fight them if they don’t do what they are supposed to do.”
And that can cost money that would otherwise pay for college.
Death and the Dreaded Blank Space
When you open a 529 account, the company you’re working with should prompt you to designate a successor. But it’s generally not mandatory for you to name one.
And quite often — perhaps in that sleep-deprived haze where parents are more worried about doing no harm to the baby than their own eventual demise — people skip the successor part, thinking they’ll get back to it later.
Then, they don’t. At Ascensus, the market leader in 529 account administration, about 25 percent of accounts have no successor. That was me, it turns out, on one of my accounts that Ascensus administers. I didn’t realize it until this week.
According to Fidelity, which has its own 529 operation, more than half of accounts have successors.
Peg Creonte, president of Ascensus’ government savings division, said it had run campaigns nudging families to fill in the blank space. For those who do see the company’s communications, death may still be a topic that is just too uncomfortable. And sometimes people are not sure whom to trust.
Given that many 529 accounts are open for 20 years or more, you can see how the lack of a successor could become a problem, particularly with aging grandparents.
If a grandparent in your life has set up a 529 account, try to ask gently about any successor. This week, I heard from two readers whose parents had died and left accounts behind. Bad-actor siblings ended up with control over 529 accounts that were supposed to benefit the readers’ children.
If there is no successor, the account administrator has probably set forth rules for what happens to the account. Sometimes, the accounts end up in a probate proceeding, which can lock up the money for a while and overlap with tuition due dates.
You could look up those rules. Or you could just go into your account and name a successor, right now. Then revisit that designation from time to time to see if you still trust that person.
Ron Lieber has been the Your Money columnist since 2008. His beat is beating the system.
The post How to Protect College Savings in Case of Divorce or Death appeared first on New York Times.
