Increasingly, the cost of sending our Las Vegas kids to college is appearing in the news. Rising tuition, reduced state funding, increased student loans, etc. are growing problems, but the question of how to pay for it all remains. One option Congress provides is a type of account called a “529 College Education Savings Plan.” These plans are a kind of trust fund set up for a beneficiary who is often a young, potentially college-bound person related to the plan’s “settlor,” who is often a parent. The benefits of the plan are that the income deposited in them is treated favorably by the tax code and they are considered as gifts to the beneficiary.
The question is, what happens to these plans if the settlor files bankruptcy?
Because the settlor has control over the account, and can even take money out of it at a penalty or even change the beneficiary at will, one would think that the plan would easily fall into the bankruptcy estate to be liquidated and sold off to creditors. However, Congress had the foresight to prevent this from happening and placed safeguards on these accounts in its 2005 revision of the bankruptcy code. Contributions into the account are treated differently depending on when they occurred.
- Anything put in two or more years before the settlor filed bankruptcy is exempt from the bankruptcy estate.
- Amounts deposited between one and two years are partly included, that is, any amount over about $5,500 is exempt. Anything above that is not, but they are subject to any other remaining exemptions.
- Finally, anything contributed within one year of the filing is included in the bankruptcy estate, again, unless it can be placed into an exemption.
These protections don’t apply in all situations. Specifically, the beneficiary must be a child, stepchild, grandchild, or step-grandchild, which includes adopted children and foster children, for the exemptions to apply. Accounts created for more distant relations, such as even nieces or nephews, are not exempt.
529 college education savings plans are helpful to parents and grandparents hoping to give their children a leg up in paying for college education, and Congress has gone to some lengths to ensure that the Trustee cannot simply liquidate them in bankruptcy. It’s subtle situations such as this that it pays to hire an experienced Las Vegas bankruptcy lawyer.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-745-8584 to set up your free consultation.