College Funds and Divorce

Many parents recognize the importance of a college education. To that end, they often start saving for their children’s college educations years before the child is even old enough to enter high school. Financial assets accumulated during the marriage are subject to equitable distribution in divorce, and New Jersey states that marital assets will be equitably divided. When parents have spent years saving for their child’s college education, they may view this as a different type of issue than, for example, their own retirement accounts that is intended to be used for their own respective personal benefits. If parents have set up a 529 account for the children, there are a few different options of what the parties can agree to do with the account, or in the alternative, to what the courts could order.

A 529 account is a special type of account that parents can open in order to save money for their children’s education. The money may be withdrawn at any time, but if the money is withdrawn for reasons other than educational payments, there will be tax penalties. One solution in a divorce is for the parties to have the 529 account divided into two separate 529 accounts. This is a good idea because it allows either or both parents to continue to contribute to their own account, which they each control. This provides for the child to still receive the benefit of the parents saving for college while also allowing each parent the ability to control the account without having to interact or agree with the former spouse about how to spend the money. Some orders may include a provision providing for minimum contributions by each parent into their own accounts, but this is not required.

Another option is to put a freeze on the account. This means that no new contributions can be made, but also the funds cannot be withdrawn except for college tuition. This type of action may be appropriate when there is a concern that one or both parents will withdraw the funds and spend the money on something other than educational expenses. The drawback to this is that the parents cannot continue to contribute to that 529.

Finally, the account could be liquidated. In other words, the final order could provide that the account be emptied and the parties divide the money. The disadvantage to this approach is that there will be taxes and penalties incurred, as the money is not being used directly for educational expenses.

Providing for your child’s future and college education is an important goal. We have experience helping our clients find solutions to how to make sure their child’s future is secure even after a divorce. Call us today at (732) 529-6937 and we can talk about your case and your child.


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