Understanding the Nuances of 529 College Savings Accounts

Many couples overlook the complexities of 529 accounts during a divorce, and families sometimes make crucial mistakes regarding successor designation, leading to complications if death occurs.

According to Ron Lieber, until recently, he hadn’t checked if he had named a successor for his children’s 529 accounts. He discovered that one account lacked this crucial information.

Establishing a 529 college savings account is an achievement. It’s fortunate if you have the financial means to do so, as many do not. These accounts typically involve four parties: the account owner, the spouse of that owner, the beneficiary, and the successor. Understanding each role is crucial, especially in the event of a divorce or someone passing away.

The Four Parties

When you open a 529 account, you become the “account owner.” Generally, there is a single owner, making this person the first relevant party. According to Mark Chapleau, a lawyer and 529 expert, the rules established for these accounts allow only one person or entity as an eligible holder. This arrangement helps manage taxes and penalties, preserving the accounts’ tax benefits.

The presence of a single account owner can cause problems for a second parent—often the spouse—especially during a divorce. We will discuss this more shortly.

The third party involved is the “beneficiary,” the individual meant to receive the education funding. You have the option to change the beneficiary over time if necessary.

Errors such as not naming a successor for a 529 account can have significant implications, especially in situations like divorce or death. Families should carefully consider these roles and ensure that all elements are properly managed.