Planning for College in Your Divorce
In Arizona, child support presumptively ends when a child is 18 and graduates high school. However, many parents understand that children are typically not ready to support themselves at 18 and many parents continue to support their children through college. If this is something that is important to you and/or your spouse, we need to talk about planning for college in your divorce.
Just because the Arizona presumptive child support guidelines terminate support doesn’t mean that’s the only option for divorcing parents. A divorce decree should include a discussion and negotiation on who is paying for college, what that entails, and how payments should be made.
First, determine if you and your spouse agree that you would like to plan for your child’s college education. If the answer is yes, now is the time to lock down some agreements.
Second, are there already existing savings accounts or funds that have been earmarked for a child’s education?
If you have already begun saving for your child’s education, you may have a 529 plan with your child as the beneficiary or another type of savings account or brokerage account for the benefit of your child. Most parents have invested in a 529 plan because of the tax savings, tax free growth, and protection from liability. Parents may mistakenly believe that this money belongs to the child- it doesn’t. And there can be only one custodian on the account. That means one parent will be named the custodian or trustee of the account- you cannot have co-trustees. If the 529 plan isn’t addressed in the divorce decree, there is nothing stopping the trustee parent from draining the account or using it in a way that you do not agree with.
You have several options for dealing with the 529 plan. You can divide the 529 plan into two equal accounts with each parent controlling half. In this case, you can each decide what happens to your half. While it offers some protection, it’s far from perfect if your goal is to ensure a certain amount of money is available for college. If there is a good deal of animosity or you want to avoid communicating at all costs, this may be the best route. Treat the 529 plan as you would any marital asset and divide it. This is a simple administrative process.
Most often, if this issue goes to trial, the court usually chooses one party (whoever it believes to be the more trustworthy or fiscally responsible parent) to manage the account. Urge the court to go further and either divide the account, choose a third-party trustee (discussed below) and make sure the divorce decree is specific about the appropriate uses of the funds in the 529plan. This will allow the court to exercise continued jurisdiction.
For instance, let’s say the court chooses the Husband to remain as the trustee for the 529 plan with a ruling that he be responsible for the costs of college. The court may reason that the Husband has an incentive to protect and grow the asset because of his responsibility to pay. This leaves open many potential questions and problems if we don’t truly consider all the potential fallout. What is the limit on the payout? Which expenses must be paid? Is Husband responsible for only four years of school? What about grad school? What about books, room, board, travel, computers, school supplies, etc? When must he pay? What if he decides he wants his child to take out loans and pay for school after the child finishes? What if the child never finishes? What if the child wants to study ceramics?
There must be some mechanism for how to handle disputes and future questions.
This is the approach advocated by Debra Hunter, CPA. Debra is a local CPA, forensic accountant and expert witness with regards to complicated financial transactions in divorce. She advocates choosing a third party to manage the children’s 529 plan and to assist the parties with future questions and decisions involving the 529 plan. “ Over the years I have seen parents drain the 529 plan without the ex-spouse’s knowledge or permission”. There is nothing the non-trustee spouse can do to stop the Trustee from taking all the money. Having a third-party Trustee, someone both spouses can agree on, is the surest way to keep the funds in the Trust until the kids go to post-secondary school.
A few additional housekeeping items to consider. Even if you are not the trustee of the account, you can ask for “interested party statements. Then the administrator of the plan would send you quarterly statements for you to monitor the account performance and activity. The faster you spot any unsavory activity, the easier it is to address. Finally, be clear on successor trustees and beneficiaries. The more details we can wrap up on the front end, the fewer problems we are likely to encounter down the line.