Children often get caught in the crossfire between divorcing parents. While parents are dealing with anger, frustration, and grief, they may inadvertently forget to place the children’s needs first. One particular situation to be aware of is how future education expenses for the children will be funded. Finances are often a difficult issue between spouses, but it shouldn’t derail your plans to help your kids pay for college.
What happens to college saving after divorce?
There are many questions you may have about how to pay the kids’ college divorce. You and your spouse can compile a list and share those questions with your attorneys, neutral financial professional and tax professionals, and then move forward from there. Some common questions include:
What happens with the existing accounts?
Often, parents decide that existing accounts that have been earmarked for college expenses should remain so. Many college accounts, such as 529 Plans, can only have a single owner or custodian – with the child as the beneficiary. In the interest of transparency, both spouses want to have visibility with respect to the account. A common solution is to have the investment company mail duplicate account statements to both parents (or grant online access). This ensures transparency and helps keep the account in the child’s best interest. If one spouse is the sole account owner, be willing to share the information and have a way for the other spouse to contribute. As part of your divorce agreement, be sure to include how the parents will discuss and agree on how the funds in accounts earmarked for college expenses are to be utilized. Decide what are appropriate expenses for the funds – tuition, books, fees, living expenses, or spring break. Be aware that tax-qualified accounts, such as 529 Plans, have limitations regarding what are “qualified expenses” in order to remain tax-free.
After the divorce, should we open our own education savings accounts?
Oftentimes, parents will, as part of their divorce agreement, include a provision to jointly continue saving for their children’s education. This is often done in separate accounts owned by the contributing parent, with the other parent as a named successor. Grandparents are often more comfortable contributing to accounts in the name of their own children.
Be sure to clearly spell out the beneficiary(s) of the account(s).
Are there tax benefits for college savings?
Contributions to specific education accounts, such as 529 Plans and Coverdell Education Savings Accounts, can have important tax benefits for the contributor. Before using the accounts to pay for higher education expenses, be sure that you fully understand and comply with the requirements for “qualified education expenses” in order for the accounts to remain tax-free.
Tips for college savings after divorce
Here are a few quick tips you and your spouse can think about implementing to help ensure the safety of college savings after divorce:
- If you aren’t a joint account holder, arrange to receive duplicate account statements. This will let you know what’s going on with your children’s future education savings.
- Be sure that a successor owner or custodian is named for each to an education savings account.
- Be sure that there is a named beneficiary for each account. 529 Plans and UTMA or UGMA accounts are useful for this purpose.
- Be sure that as part of your divorce agreement, that you have clear guidelines for qualified withdrawals.
- Make decisions based on the best interest of your children.
- Work with family law and tax professionals to make an agreement about college savings after divorce.
Work with professionals
Don’t let money be a stumbling block that affects your children’s future. Contact the professionals at Best Legal Choices, and we can help you find a way to continue saving for your child’s college account after a divorce.