No College for Debtors' Kids

 

by Thomas Monson, J.D.

You have money tucked away in your kids’ 529 Education Savings Plans (“529 Plans”). You think the money is safe from your creditors. You have a civil court case against you that does not go as expected. A substantial judgment is entered against you, yet not substantial enough for you to have to declare bankruptcy. You try to protect your assets from your creditors while you appeal the judgment. You think the 529 Plans are exempt from attachment by your creditor. Your creditor locates the 529 Plans and has the sheriff serve a writ of attachment.

You successfully convince the trial judge that the money for your kids’ college tuition is exempt from execution by your creditor. The trial judge even comments that monies held in retirement plans are protected from creditors so that people can eventually retire and that protecting monies held in 529 Plans for the education of one’s children may even be a greater reason to exempt the tuition money from execution.

But wait, your creditor thinks the trial judge is trying to make new law, which is the legislature’s job, as opposed to applying the law. The creditor appeals and the appellate court reverse the trial judge. 529 Plans are NOT exempt from execution by a judgment creditor under current California law. The appellate court explains that exemptions from attachment by a creditor cannot be enlarged by the courts no matter how persuasive the policy reasons that might support it. That task is left where our Constitution put it - with our state legislature.

So how do you protect your kids’ 529 Plans? Simple - open the account in one of the 27 states where that state’s legislature has exempted 529 Plans from levy by creditors. Most 529 Plans have no state residency requirement. However, there are many factors to consider when opening a 529 Plan so check with your financial advisor.

Our Senior Partner, Tom Monson, representing the creditor, tried this case, and did the appeal. Paul Woodard of Butterfield Schechter was co-counsel with Tom. To read the Appellate Court ruling link to:
www.mmpph.com/s/ER29_2016_Cal_App_LEXIS_310_Cal_App_2d_Dist_2016.pdf

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