Policy and Practice Working Paper
April 2007
Volume 1
Issue 4
State Creditor
Protections
for 529 Plans
Written by Barbara Rosen
Introduction
As part of the larger Saving for Education, Entrepreneurship, and Downpayment (SEED)
Initiative, state policy partners in five states are working to develop policies to create or expand
progressive savings opportunities for children. The goal of these partnerships is to invest in state
efforts that have a real possibility for a public policy breakthrough within five years. In this
process, the selected state policy partners are responsible for leading state policy development,
advocacy efforts and constituency organizing in their state. CFED supports these efforts by
providing access to comprehensive research findings for use in policy advocacy; opportunities to
share lessons with other partners at semi-annual meetings; and assistance with communications,
research, policy development, and advocacy.
During the October 2006 SEED state policy partner meeting in New York City, CFED received
inquiries about state creditor protection laws for 529 plans. These laws protect the assets in a 529
plan from the claims of creditors who are seeking repayment for outstanding debts. CFED has
issued this paper that outlines which SEED state policy partner states have creditor protection
statutes in place, and how these regulations protect the savings of account owners, beneficiaries,
and donors from attachment by creditors.
April 2007
CFED Policy and Practice Working Paper
Vol. 1, issue 4
Summary of Findings
In the case of bankruptcy, creditor protection for 529 plans is provided by federal law, with significant limitations,
under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (see Appendix B). This act excludes from
property of the bankruptcy estate all contributions deposited toward a 529 savings account for a beneficiary who is
the child, grandchild, stepchild, or step-grandchild of the debtor, and as long as the deposits were made at least two
years before bankruptcy was filed and they do not exceed the maximum amount permitted per beneficiary for the
program. If the contributions were made between one and two years prior to bankruptcy filing (for certain family
members, see above) 529 assets are protected up to $5,000 per beneficiary. These provisions apply to bankruptcy
cases filed on or after October 17, 2005 (180 days after enactment of the Bankruptcy Act).
In addition, specific creditor protections for Section 529 Plans are mandated by the states; currently at least 27 states
have passed statutes that protect accounts from creditors’ claims more generally, including those claims that have
been brought outside of bankruptcy proceedings. This paper provides information about the current creditor protection statutes for 529 plans in the SEED state policy partner states (Arkansas, California, Illinois, Kentucky, Michigan, Oklahoma), as well as a chart that compares creditor protections in other states (see Appendix C).
Thus far, Arkansas, Oklahoma, and Kentucky have passed statutes that protect 529 assets from the claims of creditors who are seeking repayment of debts. In comparison, Michigan, California, and Illinois have not passed creditor
protection laws for 529 plans. Some of the state statutes specify that 529 savings accounts are protected from the
creditors of the beneficiary, contributor, and/or the account owner (in the case of Arkansas and Kentucky). Other
statutes protect 529 accounts from creditors’ claims more generally (Oklahoma), in which case it is presumed that
the statute would protect the account from creditors of the account owner, beneficiary, and contributor.
In the case of an account held by a custodian for a minor beneficiary, creditor protection would likely not be necessary, as minors generally cannot incur enforceable debts (with some exceptions). A statute that specifically protects
an account from the creditors of a beneficiary may provide some protection in the event of a custodial account
where the beneficiary incurs debts after attaining majority but before attaining the statutory age for distribution of a
custodial account. The statutes in Arkansas, Kentucky and Oklahoma include creditor protection for the beneficiary
of the 529 savings account.
Whether or not a resident of State A with an account in State B’s 529 plan can rely on the debtor/creditor laws of
State B is unclear. The full faith and credit clause of the Constitution, Article IV, Section 1, provides: “Full Faith and
Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State.” However, the courts have applied different levels of deference to conflicts of law principles, substantive laws and judgments under this clause. The full faith and credit clause does not compel a state to substitute the statutes of other
states for its own statutes; subsequently, it is difficult to predict whether or not one state would honor the creditor
protections for a 529 plan in another state, as this issue has not been tested in the courts. Currently Florida, Texas,
and Tennessee are the only states that have statutes which provide creditor protection for 529 savings accounts established under any other state’s program.
Bart, Susan. “Creditor Protection for 529 Accounts.” November 18, 2005, p.2. Online: http://advisor.morningstar.com/articles/doc.asp?s=1&docId=4261&pgNo=2
Hurley, Joe. “529s and the new Bankruptcy Act.” April 29, 2005. Online: http://www.savingforcollege.com/529_monthly_columns/editorial.php?editorial_id=59
Bart, Susan. “College Planning Q&A: More States Offer Creditor Protection.” April 28, 2006, p.2. Online: http://advisor.morningstar.com/articles/doc.asp?docId=4426
April 2007
CFED Policy and Practice Working Paper
Vol. 1, issue 4
Appendix A
State Creditor Protection Statutes and 529 Plan Descriptions
Arkansas
Arkansas law provides:
“(2) An account or any legal or beneficial interest in an account shall not be subject to attachment, levy, or execution
by any creditor of an account owner or designated beneficiary.”
A.C.A. § 6-84-110(b)(2).
529 Plan Program Description reads:
“NO ASSIGNMENTS OR PLEDGES
Neither an account nor any portion thereof may be assigned, transferred or pledged as security for a loan (including, but not limited to, a loan used to make contributions to the account) or otherwise either by the Account Owner
or by the designated beneficiary, except for changes of designated beneficiary, qualified rollovers, as described herein, and the transfer of Account Ownership to a successor Account Owner. Any pledge of an interest in an account
will be of no force and effect. Neither an Account nor any legal or beneficial interest in an Account may be subject to
attachment, levy or execution by any creditor of an Account Owner or designated beneficiary.”
Oklahoma
Oklahoma law provides for the following exemption:
“§ 1. Property exempt from attachment, execution or other forced sale — Bankruptcy proceedings.
A. Except as otherwise provided in this title and notwithstanding subsection B of this section, the following property shall be reserved to every person residing in the state, exempt from attachment or execution and every other
species of forced sale for the payment of debts, except as herein provided:
26. Any interest in an Oklahoma College Savings Plan account established pursuant to the provisions of Section
3970.1 et seq. of Title 70 of the Oklahoma Statutes.”
31 Okl. St. § 1, A, 26.
529 Plan Program Description reads:
Bankruptcy and Related Matters
“Pursuant to Oklahoma law, any interest in a Program Account held by an Oklahoma resident shall generally be
exempt from attachment or execution and any other type of forced sale for the payment of debts in Oklahoma. This
exemption, however, may not be enforceable or available to exempt an individual’s interest in such an Account in
such individual’s bankruptcy proceedings in other states where other laws may apply.”
Bart, Susan. “Creditor Protection for 529 Accounts.” November 18, 2005, p.3. Online: http://advisor.morningstar.com/articles/doc.asp?s=1&docId=4261&pgNo=2
Gift College Investing Plan, Program Description and Participant Agreement. February 2005, p.30
Bart, Susan. “Creditor Protection for 529 Accounts.” November 18, 2005, p.4, Online: http://advisor.morningstar.com/articles/doc.asp?s=1&docId=4261&pgNo=2
Oklahoma College Savings Plan, Disclosure Booklet and Participant Agreements, July 19, 2006, p.29.
April 2007
CFED Policy and Practice Working Paper
Vol. 1, issue 4
Kentucky
Section 164A.350(9) provides that for all purposes of Kentucky law:
“(9) Notwithstanding any other provision of law to the contrary, contributions and earnings on contributions held
by the trust shall be exempt from levy of execution, attachment, garnishment, distress for rent, or fee bill by a creditor of the participant or the beneficiary. No interest of the participant or beneficiary in the trust shall be pledged or
otherwise encumbered as security for a debt.”
Ky. Rev. Stat. § 164A.350.
529 Plan Program Description reads:
Bankruptcy and Related Matters
“Kentucky law generally provides an exemption from execution or attachment by creditors of a Participant or a
Beneficiary on contributions and earnings on contributions in an educational savings plan account. Pursuant to Kentucky law, contributions and earnings on contributions in an Account shall be exempt from execution, attachment,
garnishment, distress for rent, or fee bill by a creditor of the Participant or the Beneficiary of the Account who are
resident in Kentucky for the payment of a debt owed to such creditor. This exemption, however, may not be enforceable or available to exempt an individual’s interest in the Account in such individual’s bankruptcy proceedings in
other states where other laws may apply. Nor is it clear how or whether such exemption will be applied in a proceeding commenced against such individual in a court located in Kentucky.”
Illinois, Michigan, California
Illinois, Michigan, and California currently do not have creditor protection statutes for 529 plans in place (other than
what is stipulated under the federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005).
Bart, Susan. “Creditor Protection for 529 Accounts.” November 18, 2005, p.4. Online: http://advisor.morningstar.com/articles/doc.asp?s=1&docId=4261&pgNo=2
Kentucky Education Savings Plan Trust, Program Disclosure Booklet, p.38
April 2007
CFED Policy and Practice Working Paper
Vol. 1, issue 4
Appendix B
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (enacted April 20, 2005)
The 2005 legislation excludes from property of the bankruptcy estate under Bankruptcy Code Section 541 (b):
(6) funds used to purchase tuition credit or certificate or contributed to an account in accordance with section 529(b)(1)(a) of the Internal Revenue Code of 1986 under a qualified State tuition program [as defined in
section 529(b)(1) of such Code] not later than 365 days before the date of the filing of the petition in a case
under this title, but —
(A) only if the designated beneficiary of the amounts paid or contributed to such tuition program
was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which
funds were paid or contributed;
(B) with respect to the aggregate amount paid or contributed to such program having the same
designated beneficiary, only so much of such amount as does not exceed the total contributions permitted under section 529(b)(7) of such Code with respect to such beneficiary, as adjusted beginning
on the date of the filing of the petition in a case under this title by the annual increase or decrease
(rounded to the nearest tenth of 1 percent) in the educational expenditure category of the Consumer
Price Index prepared by the Department of Labor; and
(C) in the case of funds paid or contributed to such program having the same designated beneficiary
not earlier than 720 days nor later than 365 days before such date, only so much of such funds as
does not exceed $5,000.
In addition, with respect to determining whether the 529 savings account beneficiary stands within one of the required relationships to the donor, the 2005 legislation adds the following provision to Bankruptcy Code Section 541:
(e) In determining whether any of the relationships specified in … paragraph (6)(A) of subsection
(b) exists, a legally adopted child of an individual (and a child who is a member of an individual’s
household, if placed with such individual by an authorized placement agency for legal adoption by
such individual), or a foster child of an individual (if such child has as the child’s principal place of
abode the home of the debtor and is a member of the debtor’s household) shall be treated as a child
of such individual by blood.10
10
Bart, Susan. “529 Creditor Protection under 2005 Bankruptcy Act.” June 24, 2005. Online: http://advisor.morningstar.com/articles/doc.asp?docId=4109
April 2007
CFED Policy and Practice Working Paper
Vol. 1, issue 4
Appendix C
Table of Creditor Protections for 529 Savings Plans by State11
State
Statutory
Exemption
Limited to
State’s Own
Program
Statute Specifies
Protection from Creditors of
Account Donor Owner
Beneficiary
Alaska Stat.
§ 14.40.802
Y
√
√
Arkansas
A.C.A. § 6-84110(b)(2)
Y
√
√
Colorado
C.R.S. 23-3.1307.4
Y
√
√
√
Florida
Fla. Stat.
§ 222.22
N
√
√
√
Idaho
Idaho Code
§ 11-604A
Y
Alaska
K.S.A. § 602308(f)(2)-(4)
Y
√
√
Kentucky
Ky. Rev. Stat.
§ 164A.350
Y
√
√
La.R.S.
17‑3096G
Y
Maine
Me. Rev. Stat.
Ann. title 20‑A,
§ 11478
Y
Maryland
Md. Education
Code Ann. § 181913
Y
Nebraska
R.R.S. Neb. § 851809
Y
Nevada
11
NRS § 21.090
Child Support
Divorce
Other Limitations
√
√
Kansas
Louisiana
Exemption
Inapplicable
√
Beneficiary must be lineal
descendant of account
owner. No protection for
contributions made within
one year before bankruptcy petition or judgment
for claims. Contributions
made between one year
and two years prior to
bankruptcy petition or
judgment for claims only
protected up to $5,000
per account owner.
√
√
√
Exemption is inapplicable
if “the money will not be
used by any beneficiary
to attend a college or
university.”
Y
Bart, Susan. “College Planning Q&A: More States Offer Creditor Protection.” April 28, 2006, p.2. Online: http://advisor.morningstar.com/articles/doc.asp?docId=4426
April 2007
CFED Policy and Practice Working Paper
Vol. 1, issue 4
State
Statutory
Exemption
Limited to
State’s Own
Program
New Jersey
N.J. Stat.
§ 18A:71B-41.1
Y
New York
NY CLS CPLR
§ 5205
Y
North
Dakota
N.D. Admin.
Code 12.5-0201-06 (2005)
Y
ORC Ann.
3334.15(A)
Y
31 Okl. St. § 1,
A, 26
Y
Oregon
ORS
§ 348.863(2)
Y
Pennsylvania
24 P.S.
§ 6901.309.2
Y
Rhode Island
R.I. Gen. Laws
§ 9-26-4(15)
Y
South
Carolina
S.C. Code Ann.
§ 59-2-140
Y
South
Dakota
S.D. Codified
Laws
§ 13-63-20
Y
Tennessee
Tenn. Code Ann.
§ 49-7-822
N
Texas
Tex. Prop. Code
§ 42.0022
N
Va. Code Ann.
§ 23-38.81
Y
W.Va. Code
§ 18-30-7(i)
Y
Wis. Stat.
§ 14.64
Y
Ohio
Oklahoma
Virginia
West Virginia
Wisconsin
April 2007
Statute Specifies
Protection from Creditors of
Account Donor Owner
√
Beneficiary
Exemption
Inapplicable
Child Support
Divorce
Other Limitations
Provides exemption for
moneys paid out of an
account for higher
education expenses.
√
Exemption is very limited.
See the statute.
√
√
√
√
√
√
√
√
√
√
√
√
√
√
No exemption for funds
contributed by account
owner or contributor
within one year of filing
bankruptcy petition.
√
CFED Policy and Practice Working Paper
Vol. 1, issue 4
Acknowledgements
CFED would like to acknowledge Susan T. Bart for providing valuable information and
guidance for this paper.
About CFED
Established in 1979 as the Corporation for Enterprise Development, CFED is a nonprofit
organization that expands economic opportunity. We work to ensure that every person can
participate in, contribute to, and benefit from the economy. We identify promising ideas; test and
refine them in communities to find out what works; craft policies and products to help good ideas
reach scale; and foster new markets to achieve greater economic impact. CFED works
nationally and internationally through its offices in Washington, DC; Durham, North Carolina;
and San Francisco, California.
CFED
777 N. Capitol Street NE
Suite 800
Washington, DC 20002
(p) 202.408.9788
(f) 202.408.9793
www.cfed.org
April 2007
CFED Policy and Practice Working Paper
Vol. 1, issue 4