Background and context
Parents or grandparents who establish 529 plans often forget to establish a successor on the account. Why do you need to establish a successor on a 529 plan?
With all of the good that a 529 plan is meant to accomplish, the beneficiary may find out the hard way that her or his education will not be funded. Why?
Let’s say the original account holder (e.g. grandparent) who established the 529 plan did not define a named successor to the account. In other words, who will determine how the monies will be invested, distributed, etc. when the original account holder is no longer alive?
When the grandparent passes away the monies in an “orphaned” 529 plan (i.e. one that no longer has an assigned account holder to direct the monies) may go into probate as those monies become part of the decedent’s estate. Without a named successor it becomes unclear how the original account holder wanted the funds to be utilized. On the surface it may appear obvious they were dedicated for the child. Yet, the laws say something very different. The laws imply the situation is no longer clear. The relationship or intent of the original account holder may have changed from the original date the 529 plan was established or since the last contribution was made into the plan which could have been many years prior to the account holder’s passing. Furthermore, if the original account holder becomes incapacitated in any way, the intent becomes even more vague.
When an original account holder passes away without naming a successor, the monies — which are now part of the decedent’s estate — in essence become “up for grabs”. Any of the beneficiaries to the decedent’s estate could make a claim for those monies. As you might imagine, this can get a bit messy depending on the strength of the relationships among the estate’s beneficiaries.
529 plans can end up probate?
If monies get tied up in probate it takes a lot of effort to get the court to release the monies for the beneficiary. If this happens the beneficiary (e.g. student) may not receive the anticipated education that the 529 plan was designed to fund. In fact the student may either not go to college or incur student debt which could mount accrued interest that cannot be satisfied by the 529 plan. All of this spells something that you did not expect simply because a named successor was not defined in the plan.
How does this impact a divorce proceeding?
If you designated your spouse to be the named successor, you may (or may not) want to rethink this decision. Issues to think about are as follows. Will your former spouse:
- Carry out the same set of wishes as yours for the monies dedicated in the 529 plan?
- Change the names of the beneficiaries on the account? The named successor has the right to do this.
- Continue to contribute to the 529 plan to ensure it is fully funded for the beneficiary’s education? This assumes the former spouse has sufficient means to fund the 529 plan.
- Ensure all monies are properly released to fund the beneficiary’s education as the bills come due?
If you wonder whether your spouse will manage the 529 plan the same way you will then you may want to change the named successor on the account.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.