One thing you don’t want to worry about when contemplating bankruptcy is your kids and their education.
College is expensive. Saddling your kids with student loan debt seems almost cruel, so you do what you can to lessen the burden.
That’s where the 529 Plan comes into play.
Set it up correctly and you’re home-free if you need to file for bankruptcy.
Here’s what you need to know.
What Is A 529 Plan?
529 Plans, named after the tax provision that created them, are qualified tuition programs that allow families to put money aside for a child’s college expenses. Distributions from 529 Plans aren’t taxable, which makes them a smart financial planning vehicle for parents.
Your Assets And Bankruptcy
Normally, your assets become part of the bankruptcy estate when you file your case. From there, it’s up to you and your lawyer to determine whether those accounts can be exempted from the reach of the bankruptcy trustee or must be surrendered.
529 Plan As Asset Of The Bankruptcy Estate
Though we’ve talked about 529 Plans here in the past, a refresher is in order.
Under Section 541(b)(6), a 529 Plan is not considered part of the bankruptcy estate at all to the extent that the funds were deposited into the account more than 720 days before filing of the case and if the beneficiary of the funds was your child, stepchild, grandchild, or stepgrand-child.
Funds deposited less than 720 days before filing but more than 365 days before the case is filed are part of the bankruptcy estate and you can exempt up to $5,000.
Using The California Wildcard
If you’ve got a 529 Plan and have funds that come into the bankruptcy estate, you can exempt up to $5,000. But what if you’ve got more in the account than you can protect?
Enter the wildcard exemption, which my Northern California counterpart Cathy Moran calls the grubstake.
The wildcard exemption, provided for under California law and available only in bankruptcy cases, listed in California Code of Civil Procedure 703.140(b)(1) and (b)(5), is currently $23,250 and is available for you to use to protect any assets you have that might otherwise be taken by the trustee – including a 529 Plan you might otherwise lose.
The Value Of Good Pre-Bankruptcy Planning
If you’ve got a 529 Plan and are thinking about filing bankruptcy, you’re going to want to sit down with your lawyer and start planning it out as soon as possible. Rather than expose some of your child’s future education funds to the reach of the trustee, you may decide to limit your contributions for awhile. In the alternative, we can look at your total property and decide if we can protect it with the wildcard exemption.
Either way, your goal of funding at least part of your child’s education need not be waylaid by your own financial troubles.