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What happens to college funds in divorce

New Jersey parents who have set up college funds for their children might be concerned about preserving those funds for their children after the divorce. The beneficiary on a custodial account cannot be changed, but if the account is a regular 529 or a Coverdell ESA, then a former spouse could change the beneficiary to their children from a new relationship. However, a provision in the separation agreement can prohibit this.

Parents still need to keep communication open about these accounts. If the account is not a joint one, both may still want to receive statements. The separation agreement should also discuss how both qualified and nonqualified withdrawals will be dealt with.

Examples of the former would be a child using the money in the account to pay rent to a parent they are living with while in college or a parent withdrawing money from the account if the child becomes disabled. An example of the latter might be a parent using the money in an emergency rather than dipping into a retirement account. All of these are permissible, although the latter could incur IRS penalties, but parents need to be open about how the fund is being used.

People who are concerned about their own or their children's futures in a divorce might want to discuss those concerns with their attorney. In a high-asset divorce, there might be other complex investments to divide as well. These could range from valuable collectibles to real estate to assets like vehicles and boats. A prenuptial agreement might have been signed to protect a business or other assets, but it could be subject to a court challenge if it were signed under duress.

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