Did You Know That Your Spouse Could Use Your Child’s California 529 Plan to Hide Assets?

Just when it seems like the financial side of divorce could not get more complicated, new tax rules come out to change the game. In this case, recent changes to the laws regarding California 529 college savings plans offer a new way for one spouse to hide assets from the other spouse in divorce.

If you are not working with an attorney dedicated to keeping up with the latest techniques for uncovering hidden assets in divorce, you could miss out on your fair share of marital assets.

How 529 Plans Work in California

A 529 plan is a type of account you can open to save money for certain education expenses. These plans provide tax benefits. While they are based on federal laws, each state sets slightly different rules for administering these savings plans.

Parents, grandparents and other relatives often set up 529 savings plans to pay for college or other future education expenses for their loved ones. The reason that these plans can be used to hide assets in divorce is that the child is not the owner of the plan. While the child or grandchild is the intended beneficiary of the funds in the account, the child never gains an ownership interest while the funds are in the account. Instead, whoever set up the plan is considered the owner of the plan. 

That person controls contributions made into the plan and they decide how the funds are invested. The person who sets up the plan also controls when and how funds are distributed to the student. In fact, the child who is supposed to be the focus of the account would have no idea how much money is in the account and would not even know the account exists unless the account owner makes that information known.

Money in s 529 Plan Should Be Treated as Community Property

Even if only one parent establishes and makes contributions to their child’s 529 savings plan, the funds in the plan are jointly-owned community property belonging equally to both spouses (unless the account was funded entirely with assets legally held as separate property, which is rare.) Since the money in a 529 account is set aside for a child or grandchild’s education, however, many parents and grandparents view that money as belonging to the student rather than the person who set up the account. When they list their assets in preparation for divorce, they often leave out funds in a student’s 529 plan. While a detail-oriented attorney might ask about college savings plans, in many cases, assets in these plans are overlooked during the process of allocating marital assets. This can cause a spouse to lose out on the full share of community property they should receive in the divorce.

Federal Law Allow Unused Funds in a 529 Plan to Rolled Over into an IRA

One spouse can hide assets in a 529 Plan and later, quietly move those assets into their own personal retirement account. This is because a recent change in federal law allows funds that have not been used for educational expenses to be moved into an IRA, just as long as the 529 account has been open for at least 15 years.

This creates the potential for a spouse to stash money in a child or grandchild’s 529 account, “forget” to mention that money during the divorce proceedings, and then years later keep the money as their own. They don’t even need to pay tax on the earnings.

Sometimes, attorneys forget to ask about college savings accounts. Other times, the accounts are acknowledged in divorce, but no one addresses the issue of what will happen with any excess remaining in the account after qualified educational expenses have been paid. Either way, a spouse can lose out on their fair share of marital property.

Details Matter in a California Divorce, So Work with a Legal Team That is Fully Prepared to Protect Your Interests

With over 300 years of combined experience handling divorce and other family law challenges, the team at Holstrom, Block & Parke, APLC has seen our share of attempts to hide assets. We are always mindful of opportunities where a spouse can miss out because assets are overlooked or undervalued.

You can trust our Certified Family Law Specialists and associates to work effectively to ensure that you receive the right share of community property as well as property that is rightfully your separate property. For a confidential consultation to learn more about locating hidden assets and other challenging aspects of divorce in California, contact our team today. 

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