What Happens to Accounts for Children in Divorce?
Oftentimes, during marriage, parents make financial plans for their children’s future, particularly their educational future. Considering the rising costs of higher education, many parents believe this to be an essential part of their financial plan during their marriage. The question, however, is what happens to these types of accounts when two parents decide to divorce?
There are many types of custodial accounts or college savings accounts. Two of the most common such accounts that we often address in divorce are a 529 Plan and a Uniform Transfers to Minors Act (“UTMA”) account. A UTMA account is a savings account that an adult controls for the benefit of a minor, but the account is ultimately transferred to the child when the child becomes an adult. Funds accumulated in a UTMA account can be withdrawn at any time so long as they are being used “for the benefit of the child.”
A 529 Plan is similar, except that the funds accumulated in the account are owned by the parent or custodian and must be used specifically for a child’s qualified education expenses, such as tuition and fees and room and board. As the parent controls the funds in the account, use for any other purpose may result in penalties and tax consequences. While there are many other features of these accounts, it is best to speak with a financial professional to ascertain the pros and cons of each. Specifically, each account has different tax advantages and consequences.
For purposes of divorce, college savings accounts, such as 529 Plans, may be subject to property division. Pursuant to Section 20-107.3 of the Code of Virginia, any asset earned or acquired during the marriage by either spouse is presumed to be marital property subject to equitable distribution. Oftentimes, a college savings account falls under this categorization because the parties created and contributed to the account during their marriage. In addition, some Virginia courts have held that because the 529 Plan can be revoked (albeit not without penalty or negative tax consequences), a 529 Plan is similar to a savings account that would otherwise be subject to equitable distribution. Further, because a Virginia court is unable to distribute property in a divorce to a non-party, which in this case would be the parties’ child or children, the court cannot order that the 529 Plan or the funds held in such an account be given to the parties’ child or children.
This is somewhat perplexing to many clients, who view the funds accumulated in a 529 Plan as money that belongs to the children. In that case, the parties may reach a settlement that directs that one parent remain the custodian of a child’s 529 Plan and that the parties agree that the funds will not be withdrawn for any purpose other than for the child’s qualified education expenses. The parties may also add terms in any such agreement about any continuing periodic contributions to the 529 Plan, an age cap at which the funds must be used for the child’s education expenses, and what will happen with excess funds held in a 529 Plan, or agree to exchange statements for a child’s 529 Plan on a regular basis so both parents, even after divorce, are kept informed.
UTMA accounts, on the other hand, may not be subject to division in a Virginia divorce. Because the funds held in a UTMA account are gifted to the child and are the property of the child for which the account is held, the funds are not part of the marital estate. As such, the funds held in a UTMA account may be sheltered from equitable distribution in a divorce.
That being said, everyone’s financial circumstances are different, and there are many options for addressing 529 Plans and UTMA accounts in a divorce. So, it is important to discuss your particular case with an experienced family law attorney who can explain all options to you.