{"id":51215,"date":"2023-08-21T14:34:38","date_gmt":"2023-08-21T18:34:38","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/what-happens-to-529-plans-in-the-event-of-a-divorce-my-in-laws-opened-accounts-for-our-kids-but-their-marriage-is-on-the-rocks\/"},"modified":"2023-08-21T14:34:39","modified_gmt":"2023-08-21T18:34:39","slug":"what-happens-to-529-plans-in-the-event-of-a-divorce-my-in-laws-opened-accounts-for-our-kids-but-their-marriage-is-on-the-rocks","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=51215","title":{"rendered":"What happens to 529 plans in the event of a divorce? My in-laws opened accounts for our kids, but their marriage is on the rocks.\u00a0"},"content":{"rendered":"
\n

Dear Quentin,<\/strong><\/h2>\n

My wife and I have two kids, aged 8 and 6. When the kids were born, my mother-in-law and her partner started 529 plans for them, and have been contributing since then. My wife and I have not contributed to the 529 plans; instead, we contributed to custodial accounts under the\u00a0 UGMA\/UTMA accounts for each of the kids to have more flexibility when they are older.\u00a0<\/p>\n

\n

Since they started the 529 plans, my mother-in-law and her partner were married, but now their relationship is very rocky. My mother-in-law\u2019s husband opened the 529 plans. The mother-in-law and her spouse live in a community-property state. How can I protect the 529 plans for my children\u2019s use? If they were to split, what would happen to the 529 plans?\u00a0<\/p>\n

There are certainly other issues that would take priority if they split up, but this feels like something that could be dealt with now. I know 529s are great investment vehicles, especially given the new rules about rolling them into a Roth IRA. I allowed myself to be ignorant of the accounts, assuming they were taken care of, but now I\u2019m not so sure.\u00a0<\/p>\n

Concerned Parent<\/p>\n

Dear Concerned,<\/strong><\/h2>\n

Your children are beneficiaries of this account, and the owner \u2014 presumably your mother-in-law, in this case \u2014 controls the amount being contributed to a 529 tax-advantaged college savings plan, the investment allocation, and how and when they will be distributed. She can, as the owner of the account, change the beneficiary if she wishes.\u00a0<\/p>\n

UGMA\/UTMA accounts \u2014 named for the Uniform Gifts to Minors and Uniform Transfers to Minors Act \u2014 \u00a0work differently. They are custodial accounts where the adults maintain control over the account until the child reaches the age of maturity. They are typically taxed at the child\u2019s tax rate, rather than that of the parent.<\/p>\n

The best way to resolve this is to do it amicably, and without going through the courts. That can be time-consuming and expensive, and may or may not be worth it given the amount of money invested in the 529 plan. Find out from your in-laws who owns the 529 account. A custodian cannot change the beneficiary, but an owner can do so.<\/p>\n

There have been a few court cases surrounding the ownership of such plans, and they have on many occasions treated 529 accounts as the child\u2019s property, even though they\u2019re in a parent\u2019s name, according to the law firm Goldsberry, Portz & Lutterbie. It reviewed a range of cases from Texas to Ohio and New York concerning the division of such accounts in a divorce.<\/p>\n

How divorce courts have ruled on 529s<\/h2>\n

In Ramsay v. Ramsay in Ohio, \u201cthe court \u201cregarded the funds in the 529 plan accounts as something other than marital or separate property,\u201d the firm says. \u201cThe court considered the accounts to be the property of the parties\u2019 children not subject to division between the parties during the divorce. Courts in Indiana have also treated 529 accounts as separate from the parents\u2019 property.\u201d<\/p>\n

In Zuchowski v. Zuchowski, the divorcing parties in New York agreed to share college expenses 50\/50, and keep the 529 plan in the wife\u2019s name, but years later when she tried to use that to reduce her share of the college expenses, the court disagreed, and said account should not benefit either party, but be wholly used for the child\u2019s education. (New York and Ohio are not community-property states.)<\/p>\n

That said, \u201cwhile a 529 account may legally be in a parent\u2019s name, courts are likely to consider the funds in the accounts to be the children\u2019s property and not force the parents to divide the account, and therefore withdraw funds and pay a penalty, during a divorce,\u201d Goldsberry, Portz & Lutterbie said. That should help to alleviate your immediate concerns about your children\u2019s 529 plans.<\/p>\n

You\u2019re correct that, starting in 2024, your in-laws will be allowed to roll over funds of up to $35,000 from their 529 plans to a Roth IRA owned by the beneficiary of the 529 plan. This is primarily designed for people who have overfunded their 529 accounts. In the meantime, I hope your in-laws make the right decision for them regarding their marriage, and wish you the best.<\/p>\n

Readers write to me with all sorts of dilemmas.\u00a0<\/em><\/strong><\/p>\n

By emailing your questions, you agree to have them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties<\/em><\/strong>.<\/p>\n

The Moneyist regrets he cannot reply to questions individually.<\/em><\/strong><\/p>\n

More from Quentin Fottrell:<\/strong><\/p>\n

My husband ran away to another state, bought a home and opened credit cards. Am I responsible if he defaults?<\/p>\n

\u2018I\u2019m only interested in zero risk\u2019: I\u2019m inheriting $100,000. Is a 5.5% CD a good rate? Where else should I invest?<\/p>\n

My wife and I want to retire to the Philippines. We have $193K in savings and $280K in investments, and own a $365K home. Can we do it?\u00a0<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Dear Quentin, My wife and I have two kids, aged 8 and 6. When the kids were born, my mother-in-law and her partner started 529 plans for them, and have been contributing since then. My wife and I have not contributed to the 529 plans; instead, we contributed to custodial accounts under the\u00a0 UGMA\/UTMA accounts […]<\/p>\n","protected":false},"author":1,"featured_media":1096,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-51215","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nWhat happens to 529 plans in the event of a divorce? My in-laws opened accounts for our kids, but their marriage is on the rocks.\u00a0 | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Dear Quentin, My wife and I have two kids, aged 8 and 6. 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