Protecting College Funds in Divorce

One question you might have while you are going through a divorce is what will happen to the money you’ve put away for your children in college savings accounts. You may wonder if those funds could be diverted to other purposes or if your kids will need to split the money with the children of your former partner’s new spouse.

Because it’s such an important issue, it’s important to address these questions in your divorce or separation agreement.

Common examples of college savings accounts include 529 plans, Coverdell ESAs, Custodial 529s, Roth or traditional IRAs and certain types of U.S. savings bonds. Any assets held in a 529 plan, for example, are considered gifts, which means they would not be taxed. However, the flexibility of these accounts could make them more vulnerable. Each account has its own idiosyncrasies that could make it easier or harder to exploit.

Any agreement you create should include the types of withdrawals will be allowed in your agreement, along with the types of withdrawals you will specifically disallow. You might, for example, allow emergency withdrawals in dire financial situations, but expect there to be a 10 percent penalty attached. State tax benefits and their distribution, successor owners in the event of the death of the plan owner and who receives account statements are other matters to consider.

National studies show that second, third and subsequent marriages for individuals are more likely to end in divorce than first marriages. But why is this the case? The following are some of the most common reasons marriage experts believe are behind the numbers:

Second marriages tend to be rushed: Studies indicate people tend to spend more time dating and getting to know each other leading up to their first marriage compared to their second. Second marriage relationships also often begin before the first marriage has officially ended in divorce, and that can lead to trust issues later in the relationship.

There tends to be greater financial stress: Financial issues are already a big reason why first marriages end in divorce. With second marriages, at least one spouse could have alimony or child support payments they must cover, addition to their other financial responsibilities. Additionally, both spouses have likely been working toward specific financial goals independently, and they may be less willing to compromise.

They skip out on premarital counseling: Couples that get married for a second time tend to skip the counseling that first-time spouses often receive leading up to their marriage. This means they are missing out on some important advice.

Divorcing a second time feels easier: In a second marriage, there is not as much incentive to make the relationship work, especially if there are no stepchildren or if the parents have not bonded with their stepchildren. The idea of divorce simply is not as frightening when you have already been through it.