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Preserving a child’s college fund in a divorce

On Behalf of | Sep 14, 2016 | High Asset Divorce |

Some parents in California may start a college fund for their children and then worry about what might happen to that fund in a divorce. With a 529 savings account or a Coverdell Educational Savings Account, the beneficiary can be changed. This means that a former spouse could change the name of the child on the account and use the money for themselves, their new spouse or children from the new relationship. The best way to address this is to include a provision in the separation agreement stating that the funds in the account are only for the use of the beneficiary named. If the account is a custodial one, then the beneficiary cannot be changed.

There are several other points that should be addressed in the separation agreement regarding these accounts. The owner of a 529 account can make a penalty-free withdrawal in some circumstances such as if the beneficiary gets a scholarship. Nonqualified withdrawals may also be necessary. For example, in an emergency, a person may want to use the account rather than tapping into a retirement account. Scenarios such as these should be prepared for ahead of time.

A successor owner should also be appointed to protect the account in the event of the owner’s death. Otherwise, it could pass to a parent’s new partner.

In addition to dealing with college funds, divorcing couples may need to divide other property including retirement accounts, investments and real estate. It may be necessary to create a parenting agreement in addition to the separation agreement that deals with child custody, support and various concerns parents may have such as how they might handle holidays. These documents might be negotiated out of court with the assistance of attorneys, but if this is not possible, the couple may go to court.