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Important considerations for 529 accounts in a divorce

Many parents establish 529 savings accounts to help pay for their children's college education. They're named for the section in the Internal Revenue Code that allows parents to earn interest on the money without having to pay taxes on that interest as long as it's used for the designated purpose.

New York has its own version of 529 accounts, called the Direct Plan. It allows married couples who file joint tax returns to contribute as much as $140,000 annually for each child without having to pay federal gift taxes (assuming that no other monetary gifts are made to that child for five years). Further, couples filing joint tax returns can deduct up to $10,000 in contributions when filing their state taxes.

What happens to these accounts if the parents divorce? New York courts have ruled differently in various cases where couples were battling over the ownership of the accounts, the control of disbursements from them and the tax implications in their divorce. When couples can reach an agreement on a 529 account, they can continue to maximize the tax benefits while saving for their children's college education.

There are some important considerations that you and your attorney should discuss regarding any 529 accounts that you and your spouse have so that they are clearly outlined in your divorce documents. For example:

-- Determine whether the funds in the account are separate or marital funds.

-- Determine whether one or both parents will be obligated to continue to make contributions as part of their child support obligation.

-- Designate which parent (or both) can withdraw funds.

-- Determine the ownership of the account as it relates to the Free Application for Federal Student Aid, more commonly known as FAFSA. In some cases, it may be best if the non-custodial parent is the sole account holder when it comes time to apply for financial aid.

Obviously, the most important thing is to continue to save for your child(ren)'s college education, regardless of your marital status. Your New York family law attorney can provide guidance on the best way to handle any 529 accounts. You may also wish to seek the guidance of a tax advisor to help minimize the tax implications of any decisions you make.

Source: Buffalo Business First, "Handling 529 college savings plan in divorce," Richard Dollinger and Richard Heinlein, July 12, 2016

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