EP 101: 5 Ways to Protect Your Kid's College Savings during Divorce

protect-college-savings-during-divorce

Many of you have educational savings accounts to help pay for your kids’ college expenses. When you are going through a divorce, you will want to protect that money, so that your kids can still use it for college (even if it is several years down the road).

There are several different types of educational savings accounts, but they are all similarly structured. The most common is a 529 plan. These plans are often set up when the child is born, so that the parents can make regular deposits for 17 years and accumulate enough money to cover college. The money can then be withdrawn tax-free if it is used for qualified educational expenses (such as tuition, fees, books, equipment, and room and board).

These accounts assign one parent to be the owner, who can generally use the money as they see fit. If you have an educational savings account, you may want to include these points in your divorce settlement:

1) How qualified withdrawals are used

Make sure all withdrawals are used for qualified higher education expenses (QHEE): tuition, fees, books, supplies, and room and board. You may want to assign some restrictions.

For example, if your child is living with your ex-spouse while they attend college, they could pay rent to your ex under the “room and board” provision. You probably do not intend for your money to be spent that way, so you could specify that the money must go to a specific educational institution (or a particular store for educational supplies).

2) How unqualified withdrawals are used

Sometimes, parents need to withdraw money from their child’s educational account because of an emergency or an economic downturn. These situations can be totally unforeseen, and they might happen several years after your divorce is finalized. Think about how you want to handle these cases, and include those specifics in your divorce settlement.

3) State tax benefits

Some states offer a tax deduction for contributions to a college savings plan. You may want to open a separate plan in your own name, so that you can receive those tax benefits moving forward.

4) Successors

If the parent whose name is on the plan passes away, what will happen to that money? Will it go to the ex-spouse, a new spouse, or somewhere completely different? You can specify these successors in your settlement.

5) Account statements

Ask for monthly statements from the 529 account to be sent to you. Then you stay informed about what is going on with the account, so there will not be any unexpected surprises down the line.

 

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Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.