Internal Revenue Code 529 savings plans help families save for the cost of college tuition. Some 529 plans are operated by the States while others are directly operated by educational institutions. All 50 states offer at least one type of 529 plan to help parents (or other relatives) fund the cost of college tuition. Investment and interest returns on 529 plans grow tax free. Qualified distributions for college expenses are likewise tax free. 529 plans generally come in one of two flavors:
- Savings plans – these operate much like 401(k) or IRA retirement plans.
- Prepaid tuition plans – these allows parents to “lock in” tuition rates for in-state public colleges or universities.
In some states, 529 plans have built in asset protection features. Money in a 529 plan is generally exempt from bankruptcy estates, which means that if you file bankruptcy, creditors will generally not be able to get their hands on the cash value of a 529 savings plan.
529 Asset Protection Outside Bankruptcy
What about outside of a bankruptcy filing, in the context of a lawsuit or other creditor claims? Are 529 plans protected in a civil, non-bankruptcy context? The answer depends on where you live. Individual states offer varying degrees of legal asset protection for 529 plans. In some states 529 plans are protected from the claims of creditors of the beneficiary of the 529 plan (i.e. the college student), the account owner (e.g. parent), and/or the donor of the funds (e.g. parent or other relative). Some states offer protection for all three. Other states offer considerably less protection for 529 funds. Since the asset protection component varies so considerably from state to state, your best best is to consult an asset protection attorney to find out how well your 529 assets are protected. For a complete (though not frequently updated) list of state by state creditor exemptions for 529 plans, check out Morningstar.
Florida Asset Protection for 529 Plans
Money contributed to a Florida 529 plan is broadly protected. Assets in a Florida 529 savings plan are effectively protected against creditors of the beneficiary, the account owner, and the donor of the funds to the plan.
New Jersey Asset Protection
New Jersey, on the other hand, only offers protection against the creditors of the beneficiary and the donor of funds. In other words, claims against the account owner (e.g. a parent) are not exempt and could result in a 529 plan being liquidated to satisfy a legal claim or judgment.
New York Asset Protection
The New York statute only addresses creditor claims against account owners. The statute provides legal asset protection for funds in a 529 account only while the beneficiary is a minor.
Fraudulent Transfers
If money put into a 529 plan is deemed a fraudulent transfer, then it can be attacked and “clawed back” by legitimate creditors of the person making the transfer into the 529 plan. Again, fraudulent transfers are the primary reason that asset protection planning needs to be pursued before trouble is on the horizon.