We have written about 529 Plans a few times before. The major points of those articles are: (a) 529 Plans are marital assets under Pennsylvania law; and, (b) 529 Plans can be UTMA (Uniform Transfer to Minor) Accounts in which case they are gifted property and outside the typical scope of marital assets.
Another common problem encountered in the divorce process is a collection of unbalanced 529 plans. Parties marry and have children. They begin to fund 529 Plans as the children come along. They have one child who is 14 for whom they have set aside $75,000. They have another child who is 5 for whom they have set aside only $5,000 when they divorce. The easiest answer is also the one least employed; that is to commit in a property agreement to devote the funds of both accounts for education of the children and continue to fund the accounts after divorce. Most clients do not agree on the latter point, perhaps because funds become scarce when couples divorce and assume the costs of two residences, alimony, child support and all the rest.
So, what can be done about the $70,000 disparity? If the older child’s account is regulated by UTMA, the answer is nothing. The money has been gifted and belongs to the child except where UTMA allows the custodian to employ it during the child’s minority. But if the accounts are ordinary 529s the transfers can be accomplished because the funds still belong to the account owner. Rule 1 should be to provide for a rollover in the property settlement agreement and add the words “to the extent such transfers can be accomplished without tax impact on account holding spouse.” This builds a safe harbor in case laws or regulations change. Second, a true arithmetic balance may not be fair to the elder child. A true balance would leave each child with $40,000. That would seem fair except that the elder child has only four years of growth before they start to draw on the account for college or other qualified expense. The younger child has 13 years. If both accounts are yielding 8% annual returns, the older child will have roughly $54,419 at age 18. The younger child would have roughly $115,500 at the same age.
Now, if you like statistics, realize there is another factor, inflation. Since 1980 the Bureau of Labor Statistics informs us that overall inflation has been 228%. Alas, college costs have escalated by 1184% during a corresponding period. So perhaps the adjustment is superfluous or worse. In the end, the transfer can probably be done. But work closely with the custodian of the securities (the brokerage) and don’t leave your accountant out of the mix.
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