One complicated question that arises during divorce proceedings involving children is how to handle the college savings that have been put aside. New Mexico spouses seeking divorce are often advised to set up a framework for this as part of the divorce settlement to help minimize unexpected conflict later.

Many families set up a 529 plan to deposit savings for their children’s college education. Any withdrawals from the account for non-education-related purposes incur a tax penalty. However, during contentious divorce proceedings, some spouses sometimes consider withdrawing money from the 529 account for other purposes. It might be a good idea to put a freeze on the account to prevent either spouse from doing this and ensure it will be used for the children as intended.

Another question is who should retain control over the investment strategy of the account. One parent might favor switching to a riskier, stocks-based plan to try to improve its return more quickly, while the other might prefer a conservative, bonds-based plan. Some divorce judges recommend splitting the plan into two equal plans, giving each spouse exactly half of the savings from the original. The courts might mandate how much each parent must contribute to the plan, but the spouses can each individually decide the investment strategy for their plan.

Divorce is a complicated and emotionally trying process, with many difficult questions that must be worked out, especially if children are involved and their best interests must be thought of first. It may help divorcing parents to seek dedicated legal counsel to answer their questions and make the process as amicable and fair as it can be.

Source: US News & World Report, “Discuss College Savings During Divorce Process“, REYNA GOBEL, April 29, 2013