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Are 529 Savings Plans Legally Considered a Gift to Children in North Carolina?

A 529 Savings Plan allows parents to put aside money for their kids’ college expenses under tax-favorable conditions. How should trial courts classify the money in a 529 Savings Plan that is created and funded during marriage when a couple is getting a divorce?

In a recent North Carolina marital property appellate decision, a mother argued that contributions to a 529 Savings Plan were a gift to the children, rather than marital property to be divided. Alternatively she requested that the court carve 529 Savings Plans from the marital estate by creating a rule to treat the property differently from other marital assets.

The appellate court rejected her arguments, explaining that the beneficiaries of the plan didn’t have ownership of the funds, and the people participating in the plan could choose not to spend the money on education and after paying a penalty could spend it on something different. Accordingly, contributions aren’t gifts. The court also explained that it didn’t have the authority to create a way to carve 529 Savings Plans from the marital estate. It reasoned that the General Assembly was the governmental body with this authority, and that its role was to consider the purpose of marital funds to determine equitable distribution.

The facts that led to this decision are relatively straightforward. After being married for more than 20 years, a couple separated in 2012 and divorced in 2014. The couple both held engineering degrees. The husband was employed, earning more than $300,000 each year. The mother was a stay-at-home mother. They had six kids and had started 529 Savings Plans for several of them, funding the plans with the husband’s income. They designated the mother as a plan participant and owner.

The husband sued for equitable distribution. The court decided that dividing the property unequally was equitable. The mother got 57% of the marital estate, and this included the 529 Savings Plan, as well as the couple’s home. She appealed.

The appellate court considered how funds held in a 529 Savings Plan should be classified. It reasoned that in an equitable distribution proceeding, the lower court has to classify property as separate, divisible, or marital and then distribute it under N.C. Gen. Stat. § 50-20. Any property acquired but given away to a third party, including a gift to minor children, isn’t subject to being equitably distributed. The mother argued that since the kids were listed as plan beneficiaries, the money in the 529 Savings Plan was not part of the marital estate.

The appellate court explained that in order to be considered a legitimate gift, there must be donative intent and actual or constructive delivery. These two work in conjunction, as the present intent to gift property needs to be accompanied by delivery and the delivery has to take away right, control and title over the property.

In this case, the couple’s contributions to 529 Savings Plans weren’t gifts. The tax implications of these contributions were discussed at length by the lower court. How these plans were treated for taxes didn’t determine ownership. Rather the issue was whether the couple had given an ownership interest in the funds to their kids, and therefore divested themselves of an interest. They hadn’t. The plan participants had control and ownership of the accounts.

The mother argued that classifying a 529 as marital property had negative policy consequences, posing the danger that the spouse who got the plan might have to use the funds for something that wasn’t the kids’ education. The appellate court found the argument compelling, but reasoned the court wasn’t the appropriate place for this argument.

The mother also argued that certain factual findings weren’t sufficient to support the lower court’s judgment. Specifically, she argued that the court hadn’t made a finding regarding the couple’s income, property and liabilities. The appellate court agreed. She had given evidence she had no income while her spouse earned more than $300,000 each year and this was relevant to whether there should be a more unequal division of property.

The appellate court explained that the lower court didn’t have to list all potentially relevant proof, but in this case it had incorrectly stated that there was no evidence to support that factor in dividing the property more unequally. It affirmed the classification of the property, including the 529, but sent the case back to address the insufficient factual finding.

If you are concerned about property division during a divorce, it is important to hire knowledgeable legal counsel. Call the Woodruff Family Law Group at 336.272.9122 or contact us via our online form.

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