What Questions to Ask About 529 Plans and the New Tax Act When Preparing a Divorce Agreement

March 19, 2019

In cases involving children, it is commonplace for divorce agreements to include provisions governing the payment of college expenses. This may include terms governing any existing 529 college savings plans. The new tax act now considers qualified expenses under 529 plans to include elementary and high school education of up to $10,000 per year. Distributions are now permissible for religious educational institutions and for home-based education.
Prior to the 2017 tax act, 529 plans may have been addressed in a settlement agreement by assuming they could only be used for college expenses. The expansion of 529 plan qualified expenses could undermine the intent of existing divorce agreements. Without some kind of agreement, 529 balances intended for college expenses could be dissipated earlier to pay for non- college educational expenses, contrary to the previously agreed upon intent.
The non-account owner should be informed about account activity and how the funds are used. The parties should agree to both being copied on account statements. At this time, the non-account owner party should open up a discussion about whether action is required to make certain the use of the accounts is addressed prior to any distribution in order to prevent pre-college dissipation of the funds.
Was the divorce agreement silent as to the application of the 529 funds? Do the parties have any kind of understanding about the commitment for these funds? What if one party was obligated to pay for private pre- college education and the agreement did not specify that the 529 plans were limited to college expenses? What are the financial plans if funds intended for college are distributed early?
If the agreement did not address these issues specifically, this may constitute a change of circumstance warranting a modification.
When negotiating new agreements, you may want to specify whether a spouse may distribute funds from a 529 plan to pay his or her obligations for children’s schooling prior to college. Any agreement should consider the financial consequences of a spend down prior to college.

About Jeff Metz, MT, CFP

Jeff is an equity partner and Senior Financial Counselor at RTD Financial Advisors.  Jeff graduated from Case Western Reserve University with a degree in Chemical Engineering. Jeff has a Master in Taxation degree from Villanova Law School, with an emphasis in estate planning. Jeff is a member of the National Association of Personal Financial Advisors (NAPFA), the Financial Planning Association and Financial Therapy Association. Jeff enjoys the opportunity to offer counseling that creates convergence in the actions taken to produce real financial progress and achieve peace of mind.
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