Divorce and College Savings Plans

Texas’ community property laws state that any property acquired by either spouse during the marriage belongs to both spouses equally. In the event of a divorce, the spouses must divide the property “fairly and justly” under the law. Accounts like college savings plans are subject to division just as an investment portfolio or bank account would be. The following details the relationship between divorce and college savings plans.

Should you divide or transfer the college savings plan?

In order to divide a college savings plan you will need to withdraw the assets, essentially liquidating the plan. Most college savings plans, such as the Texas Tuition Promise Fund or the Texas College Savings Plan, have tax penalties for non-education withdrawals. This means you will lose a percentage of your savings in the process of dividing the value.

Before dividing your plan, you should consider the value of the savings and talk to the administrators of the plan to determine the withdrawal penalties. You will likely find that it is a better option to keep the plan active under the name of one parent.

Transferring Ownership of a Prepaid College Plan

For the Texas Tuition Promise Fund only one parent can be the owner of the fund value, but both parents can continue to contribute to the fund even after divorce. The parent that owns the plan does not necessarily have to be the custodial parent, but it may be easier if this is the case.

If you or your soon-to-be-ex spouse must transfer ownership of the plan, the current owner can either do so voluntarily or one spouse can request that a judge mandate the transfer in a court order as part of a divorce decree.

Points to Remember with a College Savings Plan During Divorce

If you are the owner of a prepaid college plan, you can use the plan as an asset in negotiating for other marital property. For example, you may be able to give up ownership of the plan in order to obtain full control of another asset you are interested in keeping.

While you can use the plan as an asset, you must remember that the point of 529 plans or prepaid college tuition plans are to save for your child’s future education. During a Texas divorce, divorcing parents must make all agreements in the child’s best interests.

Who should own the plan?

In many divorce cases, the ownership of the plan transfers to the custodial parent and both parents make an agreement to manage future contribution obligations for each parent.

However, Joe Orsolini of College Aid Planners in Illinois recommends parents do the opposite. He suggests that the noncustodial parent retain the plan as the Free Application for Federal Student Aid (FAFSA) does not factor in the noncustodial parent’s assets or income.

Remember that regardless of who retains the plan, higher education costs are not an automatic part of child support in Texas and must be a separate part of your agreement.

The property division lawyers at The Texas Divorce Lawyer are here to help you ensure your children’s future is provided for if you already have a savings plan in place for their college tuition.

Contact us today to schedule a consultation regarding your divorce case: 214-265-7630.