A “qualified tuition plan,” sometimes called a 529 account, is a savings plan to help a family save money for future college expenses. See generally An Introduction to 529 Plans, U.S. Security and Exchange Commission, Jan. 4, 2014, available at https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html. These accounts are frequently used by parents (the account holders) to save for their children’s (the beneficiaries) college education. A 529 account will provide tax benefits to the holders but will penalize the holder if withdraws from the account are not made on eligible college expenses.
So what happens to a 529 account when the parents divorce? Is it divided between the parents?
No Texas appellate court has addressed this issue that I can see, but a few courts in other states have, and they have all treated the 529 accounts as the children’s property even though it is in the name of a parent.
In Ramsay v. Ramsay, 2012 Ohio 1715 (Ohio Ct. App. 2012), the court “regarded the funds in the 529 Plan accounts as something other than marital or separate property.” The court considered the accounts to be the property of the parties’ children not subject to division between the parties during the divorce. Id.
Courts in Indiana have also treated 529 accounts as separate from the parents’ property. In Hartley v. Hartley, 862 N.E.2d 274, 282 (Ind. Ct. App. 2007), the trial court set aside the children’s 529 accounts before looking at the parties’ property for division. See also In re Nickles, 834 N.E.2d 1091, 1099 (Ind. Ct. App. 2005).
A case from New York presents a more interesting fact pattern. There, the parties’ agreed that “each party shall keep any bank accounts in their respective names; namely, the wife in her name, the husband in his name.” Zuchowski v. Zuchowski, 925 N.Y.S.2d 541, 543 (N.Y. App. Div. 2011). The parties also agreed that each parent would pay 50% of their child’s college expenses. Id. Their child’s 529 account had been in the wife’s name, so it remained in her name following the divorce. Id.
Years later, when their child went to college, the ex-wife argued that since the 529 account was in her name, the account should be used “to reduce only her share of [the child’s] college costs.” Id. The court disagreed with her and noted that the purpose of the 529 account “was not to personally benefit either of the parties, but to fund [the child’s] college education.” Id. Thus though the account was in the ex-wife’s name, the money from the account was not to be considered her 50% contribution to their child’s education. Id.
So while a 529 account may legally be in a parent’s name, courts are likely to consider the funds in the accounts to be the children’s property and not force the parents to divide the account, and therefore withdraw funds and pay a penalty, during a divorce.