Being a parent in America is expensive. The first four years are the massive expense of daycare and then 13 years later is the massive expense of college. Some parents plan for these expenses by saving in advance by investing in 529 college savings plans. But, no one plans for divorce. So, what happens to a 529 college savings plan in an Illinois divorce?
What Is A 529 Plan?
529 plans refer to section 529 of the internal revenue code.
“A qualified tuition program shall be exempt from taxation under this subtitle.” I.R.C. § 529(a)
There are two kinds of 529 plans.
Some 529 plans are maintained by a state, or an agency or instrumentality of a state, that allows a contributor either to prepay a beneficiary’s qualified higher education expenses at an eligible educational institution. This is almost always a public in-state college.
In Illinois, the prepaid college program is no longer taking applications because the fund went broke after a series of politically connected and financially disastrous investments.
So, the only 529 plan option in Illinois is the individual savings account option.
Each 529 plan account has an account owner (usually a parent). The account owner controls the investments and identifies a single beneficiary (usually a child).
A 529 college savings plan is a savings account is invested the proceeds of those investments are not taxed…so long as they are spent on educational expenses.
Furthermore, contributions up to $ 10,000 per individual or $ 20,000 per couple are deductible when calculating annual income for the purposes of paying Illinois’ income tax (currently 4.95%)
What Happens To A 529 Plan In An Illinois Divorce
A 529 plan account opened during a marriage will be considered marital property in an Illinois.
“‘[M]arital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 5/503(a)
“For purposes of distribution of property, all property acquired by either spouse after the marriage and before a judgment of dissolution of marriage or declaration of invalidity of marriage is presumed marital property.” 750 ILCS 5/503(b)
Illinois divorce courts, “shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors, including:
… the tax consequences of the property division upon the respective economic circumstances of the parties.” 750 ILCS 5/503(d)
Because of this clause of the Illinois statute requiring the court to acknowledge the tax consequences when distributing a 529 plan, the Illinois courts will always require that the 529 plan remain in one parent’s name for its original purpose, the payment of college expenses.
Furthemore, “An account established prior to the dissolution that is to be used for the child’s post-secondary education, that is an account in a state tuition program under Section 529 of the Internal Revenue Code, or that is some other college savings plan, is to be considered by the court to be a resource of the child.” 750 ILCS 5/513(a)
Typically, parents are happy to keep 529 plans in whichever parent’s name the 529 plan is already in, so long as the money is eventually spent on the original beneficiary.
But, a divorcing parent should still be conscious as to whose name the 529 account is left in. If the named beneficiary of the 529 plan does not go to college, then the owner can change the beneficiary. The new beneficiary may not be your other child or even your grandchild but it may be a child from a new marriage or beneficiary can even be the owner of the 529 account themselves.
If the 529 plan money is not consumed by a child’s college expenses, a parent can transfer up to $ 35,000 to their own Roth IRA. 26 U.S. Code § 529(c)(3)(E)
The Obligation To Pay For College After An Illinois Divorce And 529 Plans.
Illinois divorce courts have the power to order parents to pay for their children’s college expenses.
“The court may award sums of money out of the property and income of either or both parties or the estate of a deceased parent, as equity may require, for the educational expenses of any child of the parties” 750 ILCS 5/513(a)
“In making awards under this Section, or pursuant to a petition or motion to decrease, modify, or terminate any such award, the court shall consider all relevant factors that appear reasonable and necessary, including:(1) The present and future financial resources of both parties to meet their needs, including, but not limited to, savings for retirement.(2) The standard of living the child would have enjoyed had the marriage not been dissolved.(3) The financial resources of the child.(4) The child’s academic performance.” 750 ILCS 5/513(j)
529 plans contributed to during the marriage will mitigate against the need for any ongoing educational expenses of the child.
But, 529 plans contributed to AFTER the divorce will be considered as part of the contributing parent’s share of the college expenses.
“[A]ny post-judgment contribution made by a party to such an account is to be considered a contribution from that party.” 750 ILCS 5/513(h)
So, in theory, if one parent had saved $ 20,000 in a 529 plan after the divorce, the other parent had saved nothing and college cost $ 40,000 then the parent who saved the $ 20,000 would be deemed to have met their obligation (depending on the other assets and incomes available).
But, 529 plan contributions not always an automatic deduction as described above.
The consideration of post-divorce 529 plan contributions “merely guides the court’s consideration of the child’s financial resources as it considers a number of factors under section 513(j)” In re Marriage of Wilhelmsen, 2019 IL App (2d) 180898
How Should 529 Plans Be Handled In An Illinois Divorce
If the parties were contributing money to a 529 plan before the divorce was filed, the parties should agree to continue to make the same kind of contribution on a regular basis until one party files a motion to modify that clause based on a substantial change of circumstances.
This is exactly how child support and maintenance are determined and subsequently modified. Contributions to a 529 plan should be treated the exact same way in the parties Marital Settlement Agreement. This would create a consistent expectation for all parties with minimal additional work for either party if there is a modification. If one party’s financial situation changes, then all the obligations should be modified accordingly in the same proceeding.
The existing 529 plan “is to be considered by the court to be a resource of the child” 750 ILCS 5/513(h)
The child will get to do what they want with the 529 plan’s money.
If there was never a 529 Plan, each party is free to create their own in order to offset their eventual future obligation.
It would be very difficult to order a parent to participate in a 529 plan. The law doesn’t allow for that but if there is some fear that the parent won’t provide for the child’s college a 529 plan or some other kind of trust could be requested from the court.
“The court if necessary to protect and promote the best interests of the children may set aside a portion of the jointly or separately held estates of the parties in a separate fund or trust for the support, maintenance, education, physical and mental health, and general welfare of any minor, dependent or incompetent child of the parties.” 750 ILCS 5/503(g)
If you have questions about what will happen to your children’s 529 plans during your Illinois divorce, contact my Chicago family law firm to speak with an experienced Chicago divorce attorney.