Section 529 of the Internal Revenue Code allows parents to set up education savings accounts for their child’s future college expenses. In Florida, these educational savings accounts are most commonly known as Florida’s Prepaid College Fund or Florida’s 529 Savings Plan. These types of plans can only be established for a child, stepchild, grandchild or step-grandchild and set up in the name of the person establishing the account (for example the parent or grandparent of the child) and the funds belong to that person.
When filing bankruptcy, this means the person who established the prepaid college fund for must disclose the fund in their bankruptcy petition as an asset. I am sure you are now wondering whether or not you will loose the prepaid college fund if you have to file bankruptcy, since it must be disclosed. The answer is, it depends. There are Federal and Florida specific exemptions for these types of accounts. If the exemption applies, then the funds should be safe from your creditors and you will get to keep it if you find yourself in the dire position of having to file for bankruptcy.
In Florida, Florida Statute 222.2 defines Florida’s exemption of assets in qualified tuition programs as:
“Moneys paid into or out of, the assets of, and the income of any validly existing qualified tuition program authorized by s. 529 of the Internal Revenue Code of 1986, as amended, including, but not limited to, the Florida Prepaid College Trust Fund advance payment contracts under s. 1009.98 and Florida Prepaid College Trust Fund participation agreements under s. 1009.981, are not liable to attachment, levy, garnishment, or legal process in the state in favor of any creditor of or claimant against any program participant, purchaser, owner or contributor, or program beneficiary.”
While it appears that Florida offers a 100% exemption for these types of education savings accounts, it is important to be aware of the Federal exemption as well. Why? Because if your Trustee notices that you have been putting large amounts of money into the prepaid college fund while knowing that filing for bankruptcy in the near future is a major possibility, it could be viewed that you were doing so in order to hide that money from the bankruptcy court. The rules for the Federal exemption are as follows:
- All money placed into the education savings account 2 years and longer before filing bankruptcy will be 100% exempt when filing bankruptcy.
- Money placed into the education savings account within 1 and 2 years of filing bankruptcy will only be exempt up to a certain amount. This means that any money placed into the savings plan above this set amount can be taken from the savings plan and distributed to your creditors.
- All money placed into the education savings account within 1 year from filing bankruptcy is not protected. All of it can be taken from the savings account by your Trustee and distributed to your creditors accordingly.
If you are contemplating filing bankruptcy and have established a Florida Prepaid College Plan or a Florida 529 Savings Plan for your child, it is very important to first speak with an experienced bankruptcy attorney prior to filing. The timing of your bankruptcy could potentially be the difference between being able to protect your child’s prepaid college fund and loosing it to your bankruptcy estate. Contact the Law Office of David M. Goldman, PLLC today for a free initial 30 minute consultation at (904) 685-1200.