EP 101: 5 Ways To Protect Your Kid’s College Savings During Divorce

Link: https://www.divorceandyourmoney.com/shows/protect-your-kids-college-savings
Content: 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 The money can then be withdrawn tax-free if it is used for qualified educational expenses (such as tuition, fees, books, equipment, and room and board).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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