We are wrapping up our discussion of 529 plan accounts and how couples can handle them during a divorce. The plans offer a tax advantage -- federal taxes, not Illinois state taxes -- to people who save for future educational needs, generally parents thinking ahead to their children's college tuition bills. The money in the plan account is a marital asset if it was amassed during the marriage, so it must be included in the property division settlement.
Parents have a few choices to make about the 529 plan accounts. We have talked about cashing the accounts out and freezing them. In this post, we will be discussing a third option: splitting the accounts.
Rather than maintaining the original account, the couple can ask the court to split it into two equal parts. It is just as straightforward as it sounds: The original account with, for example, a balance of $5,000 would turn into two accounts each with a balance of $2,500. This way, each parent can manage the investment mix.
One way to make sure each parent is committed to maximizing the account's return is to include in the settlement agreement a provision about college tuition. The couple can negotiate the details, but they could agree to share the expense equitably. The spouse that has the higher income could agree to foot a larger share of the bill.
The couple would still have to negotiate what would happen to any money left over. As we said in our last post, the balance could go to the next child in line, one of the spouses, whatever. The important thing is that the couple agrees up front on how it will work.
As you can see, most of these decisions require communication between the spouses. If one spouse is concerned that the other will bully or try to dominate negotiations, mediation may be an effective approach.
Source: U.S. News & World Report, "Discuss College Savings During Divorce Process," Reyna Gobel, April 29, 2013