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SECTION 529 PLANS AND DIVORCE

AN ANALYSIS UNDER INDIANA LAW


By
John R. Berger

AUTHORIZATION OF 529 PLANS


Section 529 qualified tuition programs are authorized by 26 U.S.C. Sec. 529. Pursuant to this
authorization, all states and the District of Columbia have enacted legislation establishing qualified
tuition programs.1 The programs allow either the purchase of tuition credits from an eligible educational
institution or the contribution of cash to a 529 investment account. The account must be established for
the purpose of meeting the qualified higher education expenses of a designated beneficiary of the
account. If properly established and managed, and if the account funds are distributed and used for such
qualified expenses, there is no federal income tax on earnings, and no gift or estate tax consequences.
Additionally, most states exempt the earnings from state income taxes.
Among the required provisions of a qualified 529 investment account tuition program are:
1. Sec. 529 (b)(1)(ii) provides that a qualified tuition program means a program under which a
person may make contributions to an account which is established for the purpose of meeting the
qualified educational expenses of the designated beneficiary of the account.
2. The account can have only one individual designated as the account owner or owner.
3. The account can have only one qualified beneficiary. The beneficiary is usually a child of the
account owner. The beneficiary can be changed by the account owner.
4. Any contributor to, or designated beneficiary, may not directly or indirectly direct the investment
of any contributions or their earnings.
5. Distributions from the account may be made for qualified expenses to an account owner or
participant, to an eligible educational institution, or to the beneficiary. The usual participation
agreement between the account owner and the account manager also provides that distributions can also
be made to the account owner upon request. To the extent that distributions are not used for qualified
expenses, the income portion is subject to federal income tax as ordinary income to the recipient, and a
10% penalty, subject to certain exceptions.
6. Any interest in the account shall not be uses as security for a loan.

ESTABLISHING A PLAN
Congress and the states have passed the Section 529 laws to encourage parents and other family
members to invest for the future education of their children. These plans are very popular because they
encourage savings for post-secondary educational expenses and have favorable tax treatment.
A 529 state-sponsored savings plan can be sold directly by the state or can be sold by an advisorbroker. Establishing a savings plan under a particular state savings plan does not restrict distributions to
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Berger

an eligible institution in that state, and therefore distributions can be made to any eligible out-of-state
institution.
In the usual family situation, parents establish separate 529 savings plan accounts for each child.
Because a 529 account can have only one owner, either the husband or wife is designated as owner,
signs the participation agreement, and agrees to the terms and conditions required to open such an
account. Contributions to the plans are made from marital assets and perhaps by other family members.
The contributors in establishing these plans give little or no thought to what actual ownership rights are
created as they expect that the funds will be used for the childs higher education expenses and not for
the personal benefit of the owner.

DIVORCE
If the parents seek a divorce, it is very important for them to consider, agree and include the
disposition of any 529 plans in their Marital Settlement Agreement (MSA). The agreement should
provide that the 529 account be expended solely for the qualified education expenses of the child
beneficiary. If there is any excess, the agreement should determine who is entitled to such excess. The
agreement should specify if the entire 529 account should be expended first before any agreed-to or
court-ordered percentage contribution by the parents, or if the 529 account will be divided between the
parents into two separate 529 accounts. If divided, each account may then be used by each party to
satisfy each partys agreed-to or court-ordered percentage contribution. If the parties agree or a court
orders that the 529 account assets be expended first before any required payments by the husband and
wife, this would result in effect to a disproportionate payment of educational expenses by the party who
has the lesser required payment.
The following Indiana statutes and court decisions should be considered when negotiating the
disposition of a 529 account:
1. Only vested interests in property are considered marital property. Equitable interests in third-party
property are not vested and therefore not marital property.2
2. A MSA is a contract and the parties can agree to the disposition of any assets without regard to
whether the assets are marital property.3 Even if a 529 account is not considered as marital property, the
disposition of the account in a court-approved MSA is binding. Caveat: If the agreement does not
specify that the entire account shall be used for the qualified education expenses of the child, the child
may have an interest that should be protected by a court-appointed guardian ad litem before the approval
by the court.
3. All vested assets of either the husband or wife, whatever the source, are considered as marital
property and subject to division by the court in a dissolution proceeding. 4 All marital property is subject
to a rebuttable presumption that it should be equally divided by the court in a dissolution proceeding. 5 If
a 529 account is considered as a vested asset of either the husband or wife, or both, it is marital property,
and should be divided equally between the husband and wife, subject to rebuttal. If the disposition of a
529 account is not included in a court- approved MSA, and if a 529 account is not vested and therefore
not marital property, the divorce court has no jurisdiction concerning disposition of this asset.
If no agreement can be reached by the parties as to the disposition of a 529 account, then it is
important to present this matter to the court in the dissolution trial. If the court decides that a 529
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Berger

account is vested marital property, then the court will decide the disposition. If the court decides that a
529 account is not vested marital property because it represents an equitable interest in a resulting trust
in which the beneficiary child has an interest, the court has no jurisdiction to decide ownership.
However, if the divorce court has equitable jurisdiction, and the parties agree, the disposition of the 529
account may be decided by the court at a continued or subsequent hearing upon notice to and
representation of the child by appropriate counsel including appointment of a guardian ad litem.
It is not unusual for the husband and wife to omit consideration of a 529 account in their settlement
negotiations and MSA. This results in a disposition that does not address any 529 account. 6 Husband
and wife may decide that the account really belongs to the child for educational expenses, and that the
use of the 529 account and the entire matter of post-secondary education expenses will be reserved and
decided by them or the court upon a Petition for Post-Secondary Education Expenses when the child
nears college-age.7

POST DIVORCE
Assume that there was no determination of ownership and disposition of a 529 account in the
dissolution proceeding or in any subsequent proceeding. Assume also that when the 529 account was
established, it was funded from the joint marital assets of the parties and the husband was named as the
account owner. Assume also that one month after the dissolution the husband terminates the 529
account and deposits all of the proceeds in his personal account. The wife is informed of this action and
she demands that the funds be restored for the benefit of the childs education. He refuses and states that
the participation agreement and account names him as owner and that he as owner can withdraw the
money as his sole property free of any claims by her or the child.
Does she or the child have any legal rights against the husband to recover all or a portion of the 529
account? Is the 529 account omitted marital property which should have been divided by the court in
the dissolution proceedings and should now be divided? Can attorney fees be awarded? 8 Are the assets
of the 529 account (or one-half of the assets) held by an equitable resulting trust with the husband as
trustee? 9 If so, has the husband breached his fiduciary duty by liquidating the trust account for his
person use? 10 Does the wife or the child have a right to recover from the husband all or a portion of the
account due to his conversion of the assets of the account? And if so, is the husband liable for treble
damages for the conversion? 11

THE CHARISTICS OF A 529 ACCOUNT


The Designation as account owner: Under the provisions of 529 each account when established must
designate in the Participation Agreement only one person as the account owner who directs payments for
the benefit of the beneficiary for post-secondary educational expenses. It is usual therefore when
parents establish a 529 account to designate one or the other as the owner or participant for
administrative purposes.
The designated owner or participant of a 529 account has the right to direct the account administrator
to make payments directly to the named beneficiary for qualified educational expenses, to an eligible
educational institution for said expenses, or to the owner-participant. If such payments to the
beneficiary or owner-participant are not used for eligible expenses, they are subject to income tax and a
possible penalty to the beneficiary or owner-participant.
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Berger

Being designated as an owner or participant of a 529 account is not the equivalent to conferring
absolute ownership of the account upon the designee. This designation may be considered to grant only
administrative authority similar to a trustee in administering the account for the benefit of the
beneficiaries. The purpose of allowing only one person to direct the account administrator to make
distributions at the direction of the owner-participant is to simplify administration and for the protection
of the account administrator. The requirement that only one person be designated as owner should not
determine ultimate ownership and rights in and to the account or withdrawals as the other contributor
(the wife) was not a party to the Participation Agreement. This protection is similar in concept to the
protection given to a financial institution when one joint depositor withdraws the entire account to the
detriment of the other joint owner. The withdrawing joint owner does not become the owner of the
assets withdrawn as to the other joint owner by the withdrawal. The other joint owner is still entitled to
a contributed share. The financial institution is protected, as the account administrator of the 529 account
is protected when allowing withdrawal by the owner-participant. The actual ownership of the
withdrawn funds can be determined later.12
As further indication that the designation as an account owner-participant does not of itself create
ownership rights, Sec. 529 provides that the contributions under federal gift tax law are considered as
gifts to the beneficiary children from the contributors; any distribution to a beneficiary in excess of
educational expenses is considered income of the beneficiary under income tax law; and under federal
estate tax law are not considered assets of any owner-participant. Sec. 529 also provides that the
account shall not be used as security for a loan. In addition, most state laws also contain limitations on
the use of the accounts.13
All of these limitations indicate that the designation as owner of a 529 account may be less than
establishing complete ownership.
The 529 Account as Marital Property
Most state 529 laws provide that the account owner retains ownership or is the owner of the entire
account. A literal interpretation of ownership, without consideration of the purpose of the account as set
forth in the law and as intended by the husband and wife, and the above federal and state limitations,
would lead to the conclusion that a 529 account was vested property of the account owner and therefore
marital property subject to the presumption of equal division. When divided, each party would be the
account owner of a 529 account and could use the account for the educational expenses of the
beneficiary, could change the beneficiary, or could terminate the account for the sole benefit of the
account owner. If the ownership and disposition of the account was not determined in the dissolution
proceedings, and the account was terminated later by the account owner, the proceeds should be
considered as marital property subject to the presumption of equal division, or assets of a resulting trust.
The 529 Account as a Resulting Trust
If a 529 account naming the husband as account owner is funded also by assets of the wife,
consideration should be given to interpreting the contribution of the wife as an asset of a resulting trust.
A resulting trust is an equitable principle which grants rights to a person in property titled to another.14
Resulting trusts have long been recognized under Indiana law, both statutory as to real estate and
under equitable principles as to personal property.15
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Berger

Under the assumed facts, half of the assets of the 529 account could be considered as held by the
husband as trustee of a resulting trust for the benefit of the child beneficiary.
A resulting trust is created when one person (the wife) pays consideration (the wifes funding one
half of the 529 account from the joint marital property of the parties) for the purchase of property (the
529 account), but the property is titled in the name of another (the husband as owner or participant),
and no gift to the other (the husband) was intended. The person who took title (the husband) holds the
property (one-half of the 529 account) in trust according to the actual or presumed intention of the
parties.16
The actual or presumed purpose and intent of the husband and wife in establishing the 529 account
was to provide for the childs educational expenses, and not to benefit either. Sec. 529 (b)(1)(ii)
provides that a 529 account is established for the purpose of meeting the qualified educational expenses
of the designated beneficiary of the account.
If the 529 account is liquidated after divorce by the original account owner, one half of the proceeds
(and any increase in value) should be ordered transferred by the husband to the wife to be held by her as
trustee of a resulting trust for the benefit of the childs education expenses.

CONCLUSION
It is very important for a husband and wife to consider, agree and specifically include the
ownership and disposition of any 529 accounts in their MSA. If the husband and wife agree in a MSA
as to the ownership and disposition of a 529 account, the court can approve the MSA and there is no
need for the court to determine if the assets of the 529 account are marital property or held by a resulting
trust. If there is no such agreement as to the ownership and disposition of a 529 account in the MSA,
the court should be advised by the parties and by any Mediator in the Report to the Court. If the court
decides that the assets of a 529 account are marital property, then the court has jurisdiction to determine
the ownership and disposition. If the court decides that any assets of a 529 account are held by a
resulting trust, then, in the absence of agreement by the parties, the court has no jurisdiction to decide
ownership and disposition. Such a determination may be made later by agreement between the husband
and wife, or in a subsequent court proceeding such as upon a Petition for Post-Secondary Education
Expenses.
The husband and wife in the dissolution proceedings may agree to reserve for a later determination
the issue of the ownership and disposition of a 529 account. If a 529 account is marital property, and the
existence of the 529 account was not disclosed to the court and therefore not included in the dissolution
order, then the 529 account is considered as omitted marital property. If the husband and wife later
disagree as to the ownership and disposition of the omitted 529 account, a court must decide these issues
as if originally presented in the dissolution proceeding. 17
NOTES
1. Example: Indiana Family College Savings Programs IC 21-9-7.
2. Vadas v. Vadas 762 N.E. 2d 1234 (Ind. 2002); Nicevski v. Nicevski 909 N.E. 2d 446 (Ind. Ct.
App. 2009).
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Berger

Vadas v. Vadas and Nicevski v. Nicevski state that only vested property rights are marital
property. A vested interest is one that has become a completed, consummated right for present or
future enjoyment, not contingent, not conditional, absolute. The question presented in these cases was
whether the equitable claims of a husband or wife in property titled in another should be considered as
marital property and subject to the jurisdiction of the court in the dissolution proceedings. The decisions
state that equitable claims are not vested and for that reason are not marital property. Therefore, if the
529 rights of the husband, wife, and any present or prospective beneficiary are considered as equitable
as arising under a resulting trust, such rights are not marital property.
Also see 18 J. Am. Acad. Matrimonial Law 375 for the Indiana minority rule that equitable interests
in third party property are not marital property pgs. 403-405.
3. Ogle v. Ogle 769 N.E. 2d 644 (Ind. Ct. App. 2002)
4. IC 31-15-7-4
5. IC 31-15-7-5
6. If the parties decide to postpone decisions as to post-secondary educational expenses including the
ownership and disposition of a 529 account, this should be expressly stated in the MSA to avoid a later
claim by one of the parties that the 529 account was awarded to him or her in the MSA by virtue of the
usual generic clause in the MSA which states that The husband and wife shall be entitled to any
checking, savings or other account in his or her name not specifically described herein. See footnote 9
and Zuchowski infra.
If the MSA was the result of mediation, Indiana Supreme Court Rule ADR Rule 2.7(E) requires the
mediator to file with the court prior to a dissolution hearing a statement as to whether an agreement was
or was not reached in whole or in part of the issues raised, and if not in whole, in what issues there was a
lack of agreement. The mediators statement should expressly state if no agreement was reached on any
529 account. ADR Rule 2.7 further provides that if the marital agreement is complete on all issues, a
Joint Stipulation of Disposition shall be filed with the court prior to the final dissolution hearing.
7. The issue of support for post-secondary educational expenses, may be reserved and need not be
raised and determined in the dissolution proceeding. This issue may be later determined in a separate
action. IC 31-16-2, IC 31-16-6-1
8. Attorney fees are allowed in dissolution proceedings including support. IC 31-15-10-1
9.
The following two cases illustrate the interpretation of, and rights created by, the designation as
owner in a 529 account.
Eppler v. Eppler, 837 N.E. 2d 167 (Ind. Ct. App. 2005) The Indiana Court of Appeals reviewed
the decision of the trial court wherein the trial court ordered the husband, who was designated as owner
of 529 accounts, to apply the entire accounts for the post-secondary education of the children. There
was no property settlement agreement. The trial court order stated: The childrens college funds shall
be managed by Husband for the benefit of the children pursuant to section 529 guidelines. Husband
shall utilize these college funds to pay college expenses for each child. At such time as each childs
college funds are exhausted, Husband shall pay 100% of the balance of any college costs. The
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Berger

jurisdiction of the trial court to decide disposition of the 529 accounts in the absence of a MSA was not
challenged on appeal and therefore the nature of these accounts (whether they are vested rights and
marital property, or non vested resulting trusts and not marital property) was not decided by the court.
The only issue before the appellate court was the trial courts order for the husband to pay 100% of the
balance of the college expenses. This order was approved on appeal by virtue of the large disparity on
incomes. Transfer was denied by the Indiana Supreme Court.
I have found no Indiana case which determines whether a 529 account is marital property.
In Zuchowski v. Zuchowski 85 AD3rd 777 (Appellate Division New York Supreme Court 2011),
wherein the wife was the participant and owner of a 529 Plan and claimed that it was her separate
property belonging to her, the court in an unanimous opinion interpreted a marital agreement that stated
that each party shall keep any bank accounts in their names; namely, the wife in her name, the husband
in his name as not creating ownership in her but rather creating a fund, not to personally benefit either
party, but to fund their childs education. The court states although the former wife was technically the
owner of the funds in the 529 Plan, the reason for that accounts existence was not to personally benefit
either of the parties, but to fund Peters (the beneficiary) education. The court further ordered the wife
owner to apply the money in the account to Peters college expenses before either party would be
required to contribute to such expenses. The language of the court suggests a resulting trust basis.
10. The specific state statute which authorizes the 529 account should be examined to determine if the
statute states anything concerning the rights of the account owner and the limitations thereof which may
differ from the federal requirements. See footnote 13 infra. Also see Indiana Code IC 21-9-7-4 which
states Money deposited in an account by the account owner or a contributor and investment returns on
an account are the property of the account owner. Contrast with Nebraska Revised Statutes 85-1809(1)
which states A participant (account owner) retains ownership of all contributions made under a
participation agreement up to the date of utilization for payment of qualified higher education expenses
for the beneficiary. All income derived from the investment of the contributions made by the participant
shall be considered to be held in trust for the benefit of the beneficiary.
Sec. 529 states that an account owner is entitled to receive distributions from the account but does not
specify what rights others might have in any such distribution.
11. Indiana Crime Victims Relief Act IC 34-24-3-1 A plaintiff requesting treble damages pursuant to
the Crime Victims Statute must allege and prove the commission by defendant of IC 35-43-4-2: Theft,
and/or IC 35-43-4-3(a): Conversion.
Theft IC 35-43-4-2 is defined as A person who knowingly or intentionally exerts unauthorized
control over property of another person, with intent to deprive the other person of any part of its value or
use, commits theft, a Class A misdemeanor. However the offense is a Level 5 or 6 Felony depending
on the value of the property.
Conversion IC 35-43-4-3(a) is defined as A person who knowingly or intentionally exerts
unauthorized control over property of another person commits criminal conversion, a Class A
misdemeanor.
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Berger

IC 35-43-4-1 states that exert control over property means to obtain or take, and unauthorized
control means without the other persons consent.
Plaintiffs standard of proof of theft or conversion is by a preponderance of the evidence. A prior
criminal conviction is not necessary. Wysocki v. Johnson __ N.E. 3rd __ (Ind. 2014), Conwell v.
Gray Loon Outdoor Marketing Group, Inc. 906 N.E. 2d 805 (Ind. 2009), and Coleman v.
Coleman 949 N.E. 2d 860 (Ind. Ct. App. 2011)
The requirements of the above criminal statutes that the acts be knowingly or intentionally requires
mens rea.
Under the assumed facts, a post divorce civil complaint by the wife and child beneficiary against the
husband for conversion, trespass to personal property, breach of trust and/or division of marital property
may be appropriate to decide the ownership and disposition of any 529 account not included in the
dissolution order.
The decision as to whether a 529 account is an equitable resulting trust or a vested marital asset, if
there was a breach of fiduciary duty and civil conversion, and the awarding of damages, should be made
by the court. A decision as to whether there was criminal conversion or theft, and the awarding of treble
damages for criminal conversion or theft, should be made by the court or a jury if requested. Mandatory
attorney fees would be decided by the court. Equitable causes tried before the court and civil matters
tried before a jury can be combined in a single trial. TR 38(A)
A suit for breach of fiduciary duty or under the Indiana Crime Victims Statute must be brought
within two years of when the plaintiff learns of the alleged breach of fiduciary duty or criminal activity.
KnowledgeAZ, Inc. v. Jim Walters Resources, Inc. 617 F. Supp. 2d 774 (U.S. Dist. Ct., S.D.
Indiana 2008)
12. See Ownership of Multiple Party Accounts IC 32-17-11-17 and Payments from Multiple Party
Accounts IC 32-17-11-22.
13. Nebraska Code, Sec. 85-1809 provides Notwithstanding any other provisions of the law, any
amount credited to any account is not susceptible to any levy, execution, judgment, or other operation of
law, garnishment, or other judicial enforcement, and the amount is not an asset or property of either the
participant or the beneficiary for the purpose of any state insolvency or inheritance laws.
IC 21-9-7-7 provides Funds held in an account of an educational savings program that may be
established under this article may not be used by an account owner or account beneficiary as security for
a loan.
14. See 18 J. Am. Acad. Matrimonial Law 375 for Division of Third Party Property in Divorce Cases
generally; and for resulting trusts and enforceable agreements for future education pgs. 385-386.
15. The Estate of Hann v. Hann 614 N.E. 2d 973 (Ind. Ct. App. 1993) and Emberry
Community Church v. Bloomington District Missionary and Church Extension
Society, Inc. 482 N.E. 2d 288 (Ind. Ct. App. 1985) state the following A resulting trust or implied
trust is created by implication of law based upon the presumed intention of the parties or based upon
equitable principles independent of the particular intention of the parties.
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Berger

Criss v. Bitzegaio 420 N.E. 2d 1221 (Ind. 1981) states We first note that both resulting and
constructive trusts are creatures of equity, imposed to do justice. As equitable creatures, they are not
governed by the parol evidence rule, the statute of frauds, or any other rules of law pertaining to express
trusts.
16. See 18 J. Am. Acad. Matrimonial Law 375 for the definition of a resulting trust pg. 398.
17. The following Indiana Code provision and Trial Rule should be considered when there is omitted
marital property.
IC 31-15-7-9.1 states that orders concerning property disposition may not be revoked or modified,
except in case of fraud asserted not later than six years after the order is entered.
If the ownership and disposition of the 529 account was not disposed of by the original court
dissolution order, this statute should not apply to a request to determine ownership of omitted property.
The original order did not decide ownership and therefore the original order would not be revoked or
modified as to property included in the order.
A TR 60(B)(8) Motion for Relief from Judgment is an appropriate and preferred method to modify a
dissolution order post decree as to omitted marital assets. Such a motion must be filed within a
reasonable time. The Rule provides that such a motion is not the exclusive method of raising such issue
and an independent suit may be filed to modify a judgment. See Conner v. Conner 666 N.E. 2d 921
(1996 Ind. Ct. App.)

JOHN R. BERGER
John R. Berger is a graduate of Hillsdale College (B.S. Physics 1950) and Harvard Law School
(Doctor of Jurisprudence 1953). He is a retired Judge of the Steuben Circuit Court and Professor
Emeritus of Tri-State University.
John R.
Berger