Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: What are the asset protection characteristics of Section 529 accounts?

Answer: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created special bankruptcy protections for Section 529 plan accounts.

A full federal bankruptcy exemption is provided only for funds contributed to Section 529 plans more than two years prior to the bankruptcy filing. The protection is limited to $5,000 for funds held for one to two years, and funds seasoned for less than one year are not protected at all.

The protections apply only where the account beneficiary is a child or grandchild of the debtor.  Step relatives are included in those categories.

In addition to the federal bankruptcy protections, individual state laws may also protect their residents’ in-state Section 529 accounts from the claims of the account owner’s (or beneficiary’s) creditors.  A few states, such as Tennessee, extend their protection to all Section 529 plans.  Here’s an excerpt from Tennessee Revised Codes Section 49-7-822:

Notwithstanding any law to the contrary, all assets, income and distributions of college education savings plans authorized by federal law…shall not be subject to execution, attachment, garnishment, the operation of bankruptcy, the insolvency laws or other process whatsoever, nor shall any assignment thereof be enforceable in any court. This exemption shall include, but is not limited to, plans defined in § 529 of the Internal Revenue Code, codified in 26 U.S.C. § 529….

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