College Savings Account During a Divorce

By Michael DiFalco
Partner

Many couples set up a college savings account with the intention of planning for their child’s higher education expenses. However, once a couple decides to divorce, the assets in that account need to be addressed. 

Couples often forget to consider college savings accounts during the divorce process, which can lead to trouble down the road. In other cases, ex-spouses may disagree on who should maintain control of the account or what should happen to the money being held in it. 

If you have a college savings account set up and you’re going through the divorce process, you should understand your legal obligations and options for handling this unique type of account. 

Ownership of a College Savings Account

A 529 savings plan allows parents to save for a child’s future education costs. This type of plan offers some significant tax benefits. Income placed into the account is not subject to federal income tax. However, any money in it must also be used for qualifying educational costs, like tuition or textbooks. 

College savings accounts typically only allow one person to be named as the account holder. When married parents open an account for their child, only one of them is named on the account. Nonetheless, it’s still considered to be a marital asset. 

However, once the marriage comes to an end, ownership of the account needs to be addressed. This can be a complicated matter, and exactly what happens to the account assets often depends on state law. 

College Saving Account Options During a Divorce

There’s no one go-to solution for how college savings account holdings should be handled during the divorce process. Some states, like New York, allow such an account to be treated as marital property. As such, it is subject to equitable distribution.

If parents decide to divide the money in a college savings account, they need to be careful about what they do with it. That income wasn’t taxed with the understanding that it would be used for a child’s educational expenses. 

In turn, the safest option here is for the parent not named on the account to open their own of the same type. They can then have their share of the assets rolled over into it. 

If parents prefer to leave existing assets as they stand, they also have the option of freezing the account. This ensures that current assets are protected and can only be used to fund the education of the child for whom the account was opened. Finally, spouses have the option of allowing one spouse to maintain control of an active college savings account. 

Protecting Your Child’s College Savings During Divorce

It might seem like the simplest option to allow whichever spouse is named as account owner to maintain control. However, this route comes with dangers that you should be aware of. 

Allowing one spouse to maintain ownership of a 529 savings plan means that you don’t know whether they’re actually safeguarding the money for your child’s education. While assets in a college savings account should only be spent on education, you may have no way of knowing that a former spouse isn’t using that money for other purposes. 

Another concern is that allowing one spouse to simply maintain control of the account also gives them the ability to transfer it to another child. This can become an issue down the road if they have more children.

You should always consult a divorce lawyer about your options for protecting assets in a college savings account during a divorce. A lawyer can advise you on the best way to handle the account and other assets during your divorce. 

Speak With a Garden City Divorce Attorney

Aiello & DiFalco is a family law firm located in Garden City, NY. Our experienced divorce attorneys work with clients in New York City and across Nassau, Suffolk, and Westchester counties. 

We help ensure that your interests and finances are protected by the terms of your marital settlement agreements. Call Aiello & DiFalco today to schedule a consultation with an experienced New York divorce attorney.

About the Author
I am a partner at Aiello & DiFalco LLP, and my priority for my clients is to guide them through an arduous court case to provide them with the opportunity to write the next chapter in their life. I tailor my approach to each client’s priorities and positions, and to the extent that matters can be predicted, I will always provide a realistic perspective of how the law could be applied to the particular facts and circumstances of a case. Since I thrive on helping people and solving problems, I bring an optimistic and positive approach to practicing in a very difficult area of law. With more than a decade of experience handling hundreds of cases, I have the ability to get results on the issues my clients view as priorities. When cases or certain issues cannot be settled, I have a solid record of success at trials, hearings, and on appeals. Feel free to contact me for a free initial consultation, I am always available to help.