Contract, not tax law, controls 529 plan

QI heard the new tax law changed the way money put into 529 plans can be used.

While getting divorced, I wanted to be the trustee because my husband has a sketchy work history and I feared he’d use some or all of the 529 money for his own needs.

But because my ex’s father put $200,000 into our two 529 plans — one for each of our children — my ex was permitted to have them in his name as trustee. Back then, the law only permitted one person to control each account.

Currently, we each pay half the expenses for our kids’ attendance at their private schools. I agreed to split that expense now, knowing their 529 money should pay for most, if not all of their expenses for undergraduate college.

Does the new tax law impact my situation?

AThe answer depends on whether your separation agreement specified that the 529 money was to be used for the children’s college expenses. When you divorced, the tax law permitted withdrawal of money from 529 accounts would not be taxable if the money was used to pay for college expenses.

The new tax law permits no more than $10,000 of 529 money to be used per year to pay for a child’s private or parochial elementary and high school education.

At the time you divorced, it was common for separation agreements to provide that: the 529 funds could only be used to pay for the children’s undergraduate college expenses; and both parents had to agree on what college each child would attend. In that way, the wealthier parent would not be able to force the other parent to pay for the most expensive college.

The contract language — not the new tax law — controls how that 529 money can be spent. So if the agreement requires 529 money to be used for college expenses, but your ex used some of that money to pay part of your children’s private school expenses, you’d need to file a complaint for contempt against him.

What you won’t know until a contempt trial is whether, as your ex is standing before the court, he then has the money to pay. If not, he cannot be held in contempt. But if he has the money, he should be ordered to pay more than half of the college expenses. That way you’d have whatever financial obligation you expected when you signed the agreement.

Last, the new tax law eliminated the dependency exception. So if your agreement was partially based on you or your ex being able to claim both children as dependents, that may be enough to meet the material change in circumstances standard required to warrant a modification of your agreement.

Wendy O. Hickey has since 1994 been involved in and since 2003 been a trial lawyer who concentrates her practice on national and international family law. Any legal advice in this column is general in nature, and does not establish a lawyer-client relationship. Send questions to dearwendy@ bostonherald.com.