Preserving A Child’s College Savings In Divorce


North Carolina parents who are going through a divorce will need to divide their marital assets, and college funds for children may be included in that property. Parents may be concerned about how these funds will be used. For example, the other parent might take the money for themselves or use it for children from a new relationship.

This should be addressed in the settlement agreement. It can be specified that funds set aside are only used for the named child. Depending on the type of fund, it may or may not be possible to change the beneficiary. This is allowed on Coverdell ESAs and regular 529 savings plans, but the beneficiary cannot be changed on a custodial 529 or UGMA/UTMA account.

There are other points that need to be addressed in the settlement agreement including both qualified and nonqualified withdrawals. Qualified withdrawals allow the plan owner to make penalty-free withdrawals in various circumstances such as if the beneficiary receives a scholarship. Withdrawals may also be allowed to pay rent to a parent the child is living with during college. Nonqualified withdrawals may include using the account as an emergency fund. Parents should be clear about how these withdrawals should be handled. They should also name a successor to the account. This prevents the account from passing to a new spouse if the owner dies.

People who are facing the end of a marriage may need to work out a number of complex issues such as these. People’s priority may be to protect their own financial future and that of their children, and they might want to discuss this concern with their attorney during the divorce process. For example, a person might be concerned about losing a retirement account or the family home. If a couple can negotiate property division and child custody outside of court, they may be able to come up with more flexible solutions.