College Funds and Divorce: The 529 Investment Plan

Divorce can often be hardest on your children. When you are drafting your divorce settlement, it is a good idea to provide for your children’s educational future in order to avoid conflict and confusion further down the road.

In Tennessee, contributions to a college fund must be specified by a court order and voluntarily agreed upon by both parents. Saving for college requires open communication between both parties, which can be facilitated by creating a framework during the divorce process.

Both parents can contribute to a 529 plan account, which is a tax-advantaged investment account that is used for higher education. Money contributed to a 529 plan can be withdrawn at any time for any reason but the funds will incur a tax penalty unless they are used for educational purposes. Contributors to the fund must make decisions about investments, just as they would any other investment fund. Should the parties find it too difficult to work together to manage the fund, it can be split by court order.

Conflict often arises far down the line, long after contracts are signed and contributions are agreed upon. A common disagreement is often over college costs. Should a child choose to go to an unexpectedly expensive school (such as an out-of-state school versus an in-state school) but one parent refuses to increase their contribution, the court may have to intervene. This can be avoided if a clearly worded provision for contribution to college costs is written into your contract. College costs should be clearly defined in the contract to account for tuition, room and board, and other expenses.

Contributions to college funds take into account the current income of each parent, earning history, projected earnings, and financial assets. One notable decision by the Supreme Court of Tennessee maintains that certain high-earning parents are expected to financially provide for their child’s future, including maintaining a trust fund for their child’s college education

Children often suffer as a result of divorce, but their educational future doesn’t have to. By working together early in the divorce process, you can ensure that your children’s education is a priority for your and your former spouse. For more help with your 529 investment plan, please contact our office.