Marital Contracts Provide Added Security for Higher Education Planning
As a parent, you want every advantage for your children, including a premium education at the best college or university possible. Towards that end, you sock away a portion of the anticipated yearly expenses. Unfortunately, numerous unexpected events could upend your college savings plan, and one of them is divorce. If divorce comes, can you be certain that your savings plan continues or even that the college funds you put away will go for that purpose?
Courts in New York will not mandate that parents foot the bill for a top-tier school. So, what if your soon-to-be-ex decides that divorce has taken covering college tuition off the table? In this article, we’ll discuss what you can do now to ensure that your college savings maintain their schedule and that, even in the wake of a divorce, your kids have the funds to attend the school of their dreams.
The SUNY Cap and Why You Can’t Rely on a Divorce Court to Order Ivy League Tuition
In 2023, a study found that the cost of one undergraduate year at an Ivy League university had crept up to $90,000. Meanwhile, a year at a typical SUNY, the “affordable option” for New York State residents, was hovering around $24,600. Why is that relevant to divorce? Allow us to explain.
In New York, parents are only obligated to pay child support until age 18, although certain circumstances can drive that deadline up to 21. One of those circumstances is whether all things considered, it was anticipated that the child would go to college at the parents’ expense. Judges will consider a variety of factors, such as the parents’ income, their level of education, and each child’s academic aptitude, to decide what is just and equitable for the children. Thus, a court could order affluent, college-educated parents to pay their children’s college expenses.
But there’s a catch: no matter how wealthy the parents might be, a New York court will only order them to pay as much as they would for a SUNY education. The SUNY Cap means that a court will not order parents to pay the expenses of a top-tier private college or university. So, if one parent has a change of heart, neither the other parent nor the kids can do anything about it.
Why College Savings Plans Don’t Always Translate to Tuition Payments
There are several tax-advantaged options parents can choose for college savings:
- IRA or Roth IRA — Both types of individual retirement accounts allow early withdrawal of funds (before the owner reaches 59.5 years of age) without penalty.
- 401(k) — With a 401(k), you can enjoy tax-advantaged savings, but any early withdrawal (prior to age 59.5) results in a substantial penalty. Therefore, a 401(k) is the only viable college savings option for parents who have kids after the age of 40.
- 529 college savings plan — These are tax-advantaged investment accounts specifically for college expenses. 529s have high contribution limits but a narrow range of investment options.
- Coverdell Education Savings Accounts — ESAs are tax-advantaged savings accounts designed for middle-to-low-income households. They have low contribution limits but a wide array of investment options.
Now, suppose you and your spouse have decided to fund college using a combination of plans. You put the maximum into a 529, but expect you’ll also dip into your IRA or 401(k) to handle the balance. Then divorce strikes. A court will likely divide IRA and 401(k) accounts using a qualified domestic relation order or QDRO. Absent a binding agreement to use a portion of those funds for college, either spouse can hold that money for their retirement.
How Divorce Can Disrupt College Savings Plans
There is also the question of future savings for college. There’s no getting around the fact that divorce changes your financial landscape.
A serious conflict can arise when one spouse feels that, given the new financial realities, maintaining the same rate of college savings is too great a sacrifice. Such a conflict is more likely to erupt when one parent wants to dedicate marital funds to paying for their children from a prior relationship. However, disagreement can break out over the couple’s mutual children.
On the other hand, it’s entirely possible that both parents, despite their personal differences, will be on the same page regarding their children’s higher education. They are free to draw up a marital settlement that provides for college payments at whatever school their children attend. If they approve an agreement, the court will enforce it. However, if the parents cannot settle this dispute, they’ll have to litigate the matter in court. And that’s where they hit the SUNY Cap.
Since divorce can be so disruptive to college savings plans, parents must memorialize their intentions in a binding marital agreement.
How a Prenuptial Agreement Can Settle Your Future College Expense Dilemma
Though college expenses may not be the most pressing matter for an engaged couple, it is an issue they can resolve prior to marriage via a prenuptial agreement. The couple can decide on a strategy for college savings, the type of accounts to maintain, and the percentage of their incomes they will regularly contribute. For most couples, these discussions are speculative since they don't know how many children they will have, and college seems like a far way off. However, just as with retirement planning, the sooner a couple starts, the better because deposits made early are significantly more valuable since the funds grow over time.
Couples with children from a previous relationship are most likely to include college planning in a prenup. In this situation, a parent who wants to secure their child's future can require that some portion of marital income go into college savings.
Generally speaking, whatever college terms the parties negotiate in a valid prenup will be upheld in court if they go through a divorce. This means they can pledge more than the SUNY Cap, and a New York judge will enforce that amount.
If the parties do not include college expenses in a prenup, they can revisit the subject later in a post-nuptial agreement. Parents who want to hold each other to their college funding plan can incorporate those terms into a marital contract. The same basic rules apply as for a prenup, except that there must be additional consideration for the contract to be valid. With a prenup, the simple act of going through with the wedding is a consideration that binds the parties to the agreement.
An attorney with experience drafting marital contracts can help the couple address all of their future concerns and execute an agreement according to New York’s legal requirements. At Bikel Rosenthal & Schanfield, LLP, our family law attorneys negotiate and draft detailed marital contracts, executing them with all due formality so they’ll stand up in court. Call us today.