Section 529 Plans are tax advantaged savings plans intended to encourage saving for future college costs. There are two types of qualified tuition programs: a prepaid tuition plan or a college savings plan They are authorized under Section 529 of the Internal Revenue Code (26 U.S.C. § 529).  Several of our clients have asked what happens to these funds in bankruptcy.  Are funds in the Section 529 Plans property of the Bankruptcy Estate when the account-holder/owner (usually a parent or relative of the child) files a Bankruptcy petition?

Section 541 of the Bankruptcy Code provides that the Estate includes “all legal and equitable interests of the debtor in property as of the commencement of the case” except as provided in subsections (b) and (c)(2).

Section 541(b)(6), added to the Code in October 2005 (the “BAPCPA” amendments) states that property of the estate does not include:

funds used to purchase a tuition credit or certificate or contributed to an account in accordance with section 529(b)(1)(A) of the Internal Revenue Code of 1986 under a qualified State tuition program (as defined in section 529(b)(1) of such Code) not later than 365 days before the date of the filing of the petition in a case under this title, but –

(A) only if the designated beneficiary of the amounts paid or contributed to such tuition program was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which funds were paid or contributed;

(B) with respect to the aggregate amount paid or contributed to such program having the same designated beneficiary, only so much of such  amount as does not exceed the total contributions permitted under section 529(b)(7) of such Code with respect to such beneficiary . . .;  and

(C) in the case of funds paid or contributed to such program having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date, only so much of such funds as does not exceed $5,475[.]

In In re Bourguignon, Ch. 7 Case No. 09-00766-TLM (Bankr. D. Idaho Sep. 23, 2009) (click here to download opinion), the Court discussed the application of these Code sections.  A lengthy discussion of this decision is provided in Scott Riddle’s recent entry on the Georgia Bankruptcy Blog. In short, the opinion clarifies that in order to be excluded from the Estate under Section 541(b), the funds must have been put into the account more than one year before the petition.

Like any other asset, educational funds should be discussed with your bankruptcy attorney, and you should provide your attorney with all documents related to such funds.

-Drew Broaddus