529 Plan Cashed Out

Dear Jessica:
I was divorced 8 years ago. At the time of the divorce we had a 529 plan for our daughter for college. My ex-husband agreed to continue to contribute to the plan and was to remain the trustee of the plan. Since then my daughter has become estranged from her dad for a variety of reasons, which has been really difficult her. My daughter graduates from high school this June and when I asked my ex about the 529 plan he angrily told me that he cashed it out. I had no idea that he could even do this. I thought it had to be used for college expenses. Can the Judge make him give my daughter the money he took so that she can go to college?

Dear Becky:

This is an interesting legal issue. If your divorce decree provides that the 529 plan is to be maintained by your ex-husband for the benefit of your daughter, you may be able to seek relief from the court in order to secure the funds for your daughter’s education. Contributions to a 529 plan are treated as a completed gift to the child, at least for tax purposes.

If, however, your decree lists the 529 plan as part of the property distribution awarded to your ex-husband, then the court has likely lost jurisdiction to resolve this dispute. If the 529 plan was awarded to your ex-husband, it is now his sole and separate property and as the account owner, he has control of the assets. And although the contributions to the account are treated as a completed gift to the child from a tax perspective, the account owner can technically revoke the gift, close out the account, and simply choose to pay taxes and penalties.

If the Decree has a separate provision requiring that your ex-husband contribute a specific amount to the plan on an ongoing basis, that may tend to prove that the intended purpose of the agreement was for the 529 plan funds to be used for your daughter’s college and it was not meant to be part of the property distribution. Depending on the amount of money we are talking about, it may make sense to file a motion and get the issue in front of the Court.

While most parents start out with the right intentions, circumstances change. In addition to financial issues that might lead a parent to cash out the 529 plan, a parent could enter into a new relationship, have additional children and change the beneficiary of the plan. The parent could die and fail to make appropriate estate planning to deal with the 529 plan. This is why it is so important that, regardless of who is listed as the account owner, the divorce lawyer should specify in the settlement agreement that the funds are to only be used for the interest of the beneficiary if that is the intention.

If you have more questions or wish to discuss this issue further, please feel free to make an appointment with our law offices. My business partner and I have several years of experience in family law in the Reno area.

Jessica Anderson
Divorce Attorney – Reno, Nevada