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Section 529 Arrangements and Asset Protection

For most parents, their child’s college education will be one of the most expensive purchases they will make in their lifetime. With tuition costs projected to triple by the time newborns attend college, many families set up qualified tuition plans known as “Section 529 Arrangements” to combat these rising costs.

In Florida, there are two types of “Section 529 Arrangements”: (1) advance payment plans through a prepaid college contract, and (2) educational savings plans through a 529 savings account.

Under a prepaid college contract, a person can purchase credits of the payment contract on behalf of the beneficiary (generally the student or future student)for educational expenses. This enables the beneficiary to lock in the cost for tuition, local fees, and dormitory charges as they were at the time of the contract—regardless of the corresponding costs at the time the beneficiary attends college.

For educational expenses not covered under a prepaid college contract, 529 savings accounts allow a person to contribute funds that are combined and invested to pay the college expenses of the designated beneficiary. Some distinguished college savings plans are the Coverdell Educational Savings Accounts, the Uniform Gift to Minors Act “UGMA”, and the Uniform Transfers to Minors Act “UTMA.”

In terms of Asset Protection, Section 529 Arrangements provide statutory exemptions from judgment creditors. Under Florida law, assets in an existing Section 529 arrangement offered by the State of Florida are exempt from attachment, levy, garnishment, or legal process by a creditor or claimant. This protection applies to assets held in the name of the program participant, purchaser, owner, contributor, or beneficiary.

Statutory exemptions under federal bankruptcy law are governed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Funds made to Section 529 Arrangements must meet BAPCPA requirements to be granted federal protection from bankruptcy proceedings. Some requirements are listed below:

  • The designated beneficiary is a child, stepchild, grandchild, or step-grandchild of the debtor
  • 100% of contributions are made at least 720 days before a bankruptcy filing
  • No funds are pledged or promised to any entity in connection with an extension of credit
  • Funds are not excess contributions

It is important to note that funds deemed as fraudulent transfers to a Section 529 Arrangement are not exempt from judgment creditors under Florida or federal law.

Please call our office today to speak with an experienced Asset Protection attorney to discuss the legal strategies available to protect and secure your child’s and grandchild’s college education funds.