I have been spending a fair amount of time in the last couple of years learning about the financial implications of divorce, and how best to help couples achieve an equitable and durable divorce financial settlement. The topic is far more complex (and interesting) than I originally thought, and the law is full of peculiarities. Here’s a good example relating to college costs (note: private universities have their own rules and can deviate.)
If parents are divorced, the non-custodial parent’s income and assets are not taken into account in determining the student’s eligibility for and amount of financial aid. The custodial parent’s and the child’s assets and income are the determining factors. Therefore, if the custodial parent has a lower income and fewer assets then the non-custodial parent, there is a greater potential for aid for the child. Even more strangely in my view, if the custodial parent remarries, his or her spouse’s income and assets are included, even if there is a prenuptial agreement in place.
There are some obvious planning opportunities here, including shifting custodial status the year before financial aid forms are due. Also, since a 529 account is considered an asset of the parent and not the child, it will be better for the non-custodial parent to own the 529. Note, however, if the non-custodial parent pays for any part of college education, it will be included in the child’s income the following year. Thus, if there is no 529 account, it may be more beneficial for the student to take out loans and have the non-custodial parent help pay off the loans versus pay the bills as they come due.
I frankly don’t agree with these rules but it’s not going to stop me from informing my clients of these opportunities should they be helpful to them.