Protecting College Funds During Divorce

Virginia parents work hard to set aside money to help see their children through college. In the event of a divorce, a clear separation agreement is necessary to ensure that college savings are retained for their intended purpose.

Popular college savings plans, such as 529s, are not only tailored to allow families and students to accumulate funds for the steep expenses of postsecondary education but also come with important tax benefits in many cases according to U.S. News and World Report. Indeed, Virginia is one of many states that allows 529 account owners to claim deductions of up to $4,000 on their income taxes, and these accounts are exempt from federal income tax as well.

Virginia offers investors a choice between direct-sold and advisor-sold plans with a vast array of fund selections. One common requirement is that the funds be used either within 10 years or 30 years of the beneficiary’s graduation from high school depending on the plan selected.

Most parents create college savings plans, including both 529s and Coverdell Education Savings Accounts, with the intention that the money will benefit their children. Forbes reports that in the event of a divorce, however, these accounts will most likely be considered property and be subject to division.

In this scenario, the sheer flexibility of these accounts can make them contentious. A vindictive ex-spouse could use the 529 as leverage with the child or even apply the funds to his or her own educational costs. Similarly, the owner of a Coverdell ESA can easily make himself or herself the beneficiary or designate another child or other family member as the beneficiary.

Thus, it is essential that separating couples arrive at an agreement with respect to how college funds should be managed. These agreements should include how withdrawals are to be handled and who is listed as the successor to the account. It is also a good idea for both parties to receive statements regardless of who the account owner is to enable each spouse to monitor the uses to which the funds are put.