Knowing how to handle college savings and other important financial assets during a divorce is one of the most important components of the process. Depending on how you are managing these savings, a divorce may put this money at risk. Here’s a look at how to manage these important funds for your children’s future.
How to Handle College Savings During Divorce:
- 529 plans: This is the most common form of college savings account. It allows you to keep a tax-free account for the purpose of education. During a divorce, however, there may be nothing to stop your spouse from changing the beneficiary of this account. Your ex could potentially use the funds for children from another marriage, or even for themselves. One solution could be to clearly indicate in the separation agreement who will benefit from these funds. Make sure you also set rules on when an account holder can and cannot draw from this account. In an emergency, your ex-spouse might want to pull from the account and pay tax penalties.
- Coverdell Education Savings Accounts: These accounts will be similar to the 529, in that they are treated as being outside of the account owner’s financial estate. Also, like a 529, the owner can change the beneficiary. These accounts can be split in divorce without being taxed. As far as your divorce is concerned, your strategy should be more or less the same here as for the 529.
- Custodial 529 or UGMA Account: These accounts may be the least complicated during a divorce. From the beginning they specify who will receive the funds. The disadvantage is that once the beneficiary comes into the account they gain full control of it. Some parents do not like the notion of entrusting such a large account over to a young adult, but it eliminates the risk that the funds will go to anyone but the intended child.
- U.S. Savings Bonds: Bonds will be split in a divorce like other investment assets. If you intend for them to be used for education, your agency will likely mostly be on your side of that split. It’s of course possible that you agree to designating that money for education, however. The United States government makes splitting bonds easier than you may think. The Treasury Department will split and reissue bonds upon request.
Paying for college can be financially complicated, and the added complication of a divorce makes things even trickier. Knowing the basics going in will help you to ask your financial advisor and divorce attorneys the right questions to make sure you understand the path ahead.