Asset Protection and College Planning

A 529 savings plan is an account intended to help families save for the cost of college tuition.  Such plans can be operated by states or educational institutions, and all 50 states offer at least one type of 529 plan to help parents (or other relatives) set aside funds for the cost of college.  Investment and interest returns on 529 plans grow tax free, and qualified distributions for college expenses are likewise tax free.  529 plans generally come in two varieties:

• 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.

Interestingly, 529 plans have some built in asset protection features.  For example, money in a 529 plan is generally exempt from bankruptcy estates.  That means that if you have money in a 529 plan and file bankruptcy, creditors will generally not be able to get their hands on the money.

But what about outside of bankruptcy, in the context of a lawsuit or other creditor claims?  Are 529 plans protected in that context?  The answer depends on where you live.  Individual states have laws that protect 529 plans from creditor claims in various ways.  Some plans are protected from the claims of creditors of the beneficiary of the 529 plan, the account owner, and/or the donor of the funds.  The asset protection component varies considerably from state to state, so your best best is to consult an asset protection attorney to find out how your state laws work.

Florida Asset Protection

In Florida, for example, money contributed to a 529 plan is broadly protected.  Protection of the assets in such a plan is effective 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.

New York Asset Protection

The New York statute only addresses creditor claims against the account owner and provides asset protection for funds in a 529 account while the beneficiary is a minor.

Again, each state differs in how specifically its statutes protect funds set aside for college.  Finally, if money put into a 529 plan is deemed a fraudulent transfer, then it can certainly be attacked.  Again, fraudulent transfers are the primary reason that asset protection planning needs to be pursued before trouble is on the horizon.