by Adam Mack
Your back is against the wall, your debt collectors have been after you for a while, and now the garnishments have begun. It is clear that you need to file bankruptcy, but you have sacrificed to build up a college savings account for a family member or someone else has created such an account for you. What will happen to that account?
IF YOU ARE THE OWNER OF THE ACCOUNT
Fortunately, Kansas bankruptcy exemptions provide a means of protecting this money, but there are limitations to this protection. Kansas statute provides that any money is exempt if held in a post-secondary education savings account established for a lineal descendant of the account owner with the exception of the money contributed to the account one year immediately proceeding the filing of your case. KSA 60-2308(f).
IF SOMEONE ELSE IS THE OWNER OF THE ACCOUNT
The threshold question in determining whether an asset is exempt or not is whether ownership of that asset has vested in the person filing. So it would seem that if a post-secondary educational savings account was set up and owned by another person for your benefit, then this seems like a fairly straight forward question. However, like most things in law, it is rarely as straight forward as it appears.
On one hand, the Federal statute states that 529 Plans are “completed gifts” suggesting that the property is vested in the beneficiary upon the creation of the account, arguably making the 529 Plan part of the bankruptcy estate. On the other hand, also under Federal statute, the creator of the 529 Plan also has the right to cash out and close the account at any time, suggesting that the property has not actually vested in the recipient of the account.
To add another level of murkiness to the issue, case law is sparse on the treatment of 529 Plans in bankruptcy. It appears the only case that takes up this issue was a Kansas case called In re Werth. For purposes of this article, the primary consideration for the Judge deciding this case was who owned the account. The Court held that if the person filing the bankruptcy was the person that owned/controlled the account, then the money contributed to the account within a year of filing was not exempt. However, the Court was silent on how it would treat the money contributed to a 529 Plan that was created for the benefit of a debtor but owned/controlled by another party. In short, this particular point of the law is unsettled and you should discuss the facts of your situation with a qualified Kansas bankruptcy lawyer before filing your bankruptcy petition.
It is important to note that this post-secondary educational savings account cannot just be any savings account you are saving money in for your child or grandchild’s education. It must be an account specifically created for that purpose under KSA 75-640, i.e. a 529 Educational Savings Account.
These articles are for general informational use and do not constitute legal advice. Since laws change over time, it’s possible some articles are out of date and for that reason, we make no representation that the articles are fully accurate. For actual, up-to-date legal advice (including a free consultation), please contact us!