How To Prevent Your Divorce From Ruining Your 529 Plan
A 529 plan is a savings plan meant for the future educational expenses of children. The main attraction of these plans is the associated tax benefits. If you have such a plan, then you should know that your divorce can ruin it. Here are three measures to preserve your 529 plan even after divorce:
Have Two Plans
Even though everybody wants their marriage to work, statistics show that about 41% of first-time marriages in the U.S. end up in divorce. Therefore, you shouldn't view it as encouraging divorce if your spouse proposes a plan to split your family's 529 plan into two.
Splitting the funds, so that each person manages one, is a smart move because it ensures continuity in the event of a divorce. In an acrimonious split, it would be difficult for one parent to put money into the fund if it is managed by the other parent. If you have two funds, however, you can both continue investing in them for the betterment of your kids' future.
Specify Allowed Expenses
Most people know that 529 plans are used for college expenses, but what exactly are college expenses? It is good to know this distinction because, if you spend the money for non-educational purposes, then you may incur expensive tax consequences.
For example, rent is considered college expenses, but room furnishings are not. Your child doesn't need a big screen TV in order to attend college.
Therefore, you need to specify in the fund the kinds of expenses you intend to meet with the money. For example, you can restrict it to tuition, rent, and books and exclude things like cars and electronics. That way, you eliminate the risk of your former partner using the money to fund a lavish lifestyle for the child.
Specify a Successor
Lastly, it is also advisable to specify who gets to manage the funds in case one of you passes away. This is to rule out the possibility of a rogue fund manager messing up with your child's future. Ideally, you should be the funds successor in case of your former spouse's demise, but even if it isn't you, you should know that the money will be in the hands of a responsible individual.
As you can see, divorce can have a great impact on your child's educational and financial future. That would be disastrous because the child shouldn't suffer for your (the parents') mistakes. Hopefully, you will consult a professional family attorney like Aaron Law Offices PLLC to help you ensure that this doesn't happen.