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#13508 - 11/29/04 07:31 AM 529 and Civil Judgments
Benjy Offline
Junior Member

Registered: 11/29/04
Posts: 1
Would a judgment such as a medical malpractice award put a 529 plan for a child at risk?

#13509 - 11/29/04 03:00 PM Re: 529 and Civil Judgments
pdshaw Offline

Registered: 08/12/02
Posts: 45
Loc: Springfield, IL, USA
Yes. The money in the 529 account is deemed property of the owner and can be used to satisfy debts of the owner.

Ways to approach this. First, open the account in the name of an owner other than the doctor. This could be a spouse, close relative or trust. This entails the risk of a loss of control (from the doctor's perspective) and addional costs if a trust is to be created. Second, some states exempt money from 529 accounts from levy. The problem is that such exemptions will probably not be recognized in other states (IMHO) and aggregious situations will probably provoke a fraudulent transfer lawsuit or a legislative recall of the exemption. Third, buy adequate malpractice insurance and direct the insurance company to settle any claim within the coverage limit.

#13510 - 11/30/04 09:09 AM Re: 529 and Civil Judgments
Andrewremedy Offline

Registered: 02/07/04
Posts: 466
Please note that the assets are technically now the beneficiary's as the result of a completed gift to same. The owner doesn't own the assets any more!!!

A good number of states specifically state that the mere owner of a plan is essentially judgement proof as to the plan. BUT that feature is somewhat new--and who knows just how bullet proof it is. My guess is that states have a lot riding on the fact that it is bulletproof--and they will defend same--for their own residents of course---and perhaps others.

Whether or not short time frame movement into a plan constitutes fraudulent conveyance --once the liability becomes known--is another question.

However that said, the owner still has the right to unwrap the plan back to himself--so a cleverly worded court order might just order one to do that--and unwrap the protection via a side door---unless of course you cycled the plan thru a state which allows for easy change of ownership (to a bulletproof new owner) Since the change of ownership is NOT the change of any current value it may be that this end runs any conveyance issues. The 529 is an odd duck, very odd duck--most property issues are state law issues--and the two do not mesh well.

Obviously if you do not own the plan you have no such risks--but the "owner " mayhave some issues--and you may lack true control of the "owner?"

#13511 - 11/30/04 10:20 PM Re: 529 and Civil Judgments
Joe Hurley Offline


Registered: 01/07/00
Posts: 2807
Loc: Pittsford, NY, USA

I know that you and I do not necessarily view this the same way, but I think your statement that the assets are technically now the beneficiary's is a little misleading. Just because the federal government has dictated completed gift treatment for gift tax purposes does not mean that the ownership rights are somehow affected. Your other statement that most property issues are state law issues, and the two do not mesh well, is right on. And many states do wrap their 529 plans in special creditor protection provisions (but seek legal advice as to applicability in your own particular circumstances).


#13512 - 12/01/04 09:34 AM Re: 529 and Civil Judgments
Andrewremedy Offline

Registered: 02/07/04
Posts: 466
Joe is CORRECT--a 529 is a completed gift at the Federal level for gift/estate tax purposes--which is sort of all the Feds can address. And as far as I can tell the gift recipient has no rights per se from the Federal law --not even the right to refuse the gift

And you will note that it is NOT an asset of the beneficiary's but of the participants for aid purposes under the feds own methodology! And some medicaid types take the view that it is still the participants property when it comes to potential exclusion for grandma from care if grandma "owns" a 529 for grandson.
And I gather ones spouse of participant can have some issues especially in community property states

State law would cover other aspects of who owns or controls whatever--and possible multiple state laws--if you "own" a plan from another state--and thats a whole set of Constitutional debates. PS my own state gives its own plans different treatment as to who owns the asset (at particiapants death) compared to "foreign" plans--PA has a very nasty inheritance tax so its not a moot point for older particiapants.


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