Section 529 Plans are tax advantaged savings plans intended to encourage saving for future college costs. There are two types of qualified tuition programs: a prepaid tuition plan or a college savings plan They are authorized under Section 529 of the Internal Revenue Code (26 U.S.C. § 529).  Click here for a basic summary of 529 Plans. Are funds in the Section 529 Plans property of the Bankruptcy Estate when the account-holder/owner (usually a parent or relative of the child) files a Bankruptcy petition?

Section 541 of the Bankruptcy Code provides that the Estate includes “all legal and equitable interests of the debtor in property as of the commencement of the case” except as provided in subsections (b) and (c)(2) of this section. 

Section 541(b)(6), added to the Code in October 2005 (the "BAPCPA" amendments) states that property of the estate does not include:

funds used to purchase a 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 . . .;  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 $5,475[.]

 In In re Bourguignon, Ch. 7 Case No. 09-00766-TLM (Bankr. D. Idaho Sep. 23, 2009) (click here to download opinion), the Court discussed the application of these Code sections.  Debtor opened a Section 529 Plan for their daughter on March 10, 2009, and deposited an initial $14,500 into the account.  Debtor’s Mother subsequently added $40,000 to the account.  Debtors filed a Chapter 7 petition two weeks later. Debtors did not list the account in Schedule B or on their Exemptions.

The Court found that the Debtors had a legal interest in the account as of the petition date, and it was property of the Estate. It was not excluded under § 541(c)(2): 

Debtors’ argument that § 541(c)(2) is applicable to the College Account fails. That exception deals with restrictions on transfer “of a beneficial interest of the debtor in a trust[.]” There is inadequate proof of a qualifying trust interest of Debtors. Debtors are not the “beneficiaries” of the College Account; Christian Bourguignon is, instead, the account owner. Debtors’ daughter is the designated beneficiary. Even if Debtors arguably have a contingent, beneficial interest in the College Account because either could potentially become a beneficiary the College Account does not contain the requisite anti-alienation and anti-assignment provisions required under nonbankruptcy law and recognized by § 541(c)(2).

The Court then addressed Debtors’ primary argument that the account is excluded under Section 541(b)(2). 

Focusing on the term “not later than” and urging the Court to treat it as synonymous with “within,” Debtors contend that “not later than 365 days before the date of the filing” as found in § 541(b)(6) means that “if funds were put into a 529 account LESS THAN ONE YEAR before the petition day, they are NOT property of the estate.” … Debtors’ interpretation of the Code lacks merit.

The natural reading of § 541(b)(6) provides an exclusion from property of the estate for 529 accounts on a sliding scale. Assuming the qualifying conditions of § 541(b)(6)(A) and (B) are met, any such contributions made to a 529 account more than 720 days prior to bankruptcy are fully excluded from property of the estate. Such  contributions made between 365 and 720 days prior to bankruptcy are excluded from property of the estate to the extent below $5,47513 but any such contributions over $5,475 in that same time frame remain property of the estate. Any amounts contributed within a year of bankruptcy are not excluded at all from property of the estate…

Thus, for funds to be excluded from property of the estate under § 541(b)(6), they must be contributed to a 529 account at least a year before the filing of the bankruptcy, and, even then, there is a monetary cap on the excluded funds contributed between 365 and 720 days prior to the filing. It is only those funds contributed more than 720 days before filing that are excluded without a monetary limit. …In sum, Debtors’ desired construction is not supported by the language of the statute, plainly read; any plausible policy rationale; or their own account documents.

 In addition to the funds contributed by the Debtor being property of the Estate, the Court also held that the $40,000 contributed by Debtor’s mother was also Estate property

Section § 541(b)(6) makes certain funds contributed into a 529 account property of the estate and excludes others, but that distinction is based on the timing of contribution, not the source of the contribution. Indeed, during the September 3 hearing, Debtors conceded the Code makes no distinction based on the source of the contributions.

Debtors instead rely on the language of their College Account’s plan description, which states that “Contributions . . . by an Account Owner” made within a year of filing bankruptcy are part of the account owner’s bankruptcy estate and are available to creditors, but which does not mention a third party’s contributions. See Ex. 201 at 13. The plan description’s silence on the subject of third party contributions does not suggest differential treatment under § 541(b)(6). More importantly, the description cannot alter the language and operation of the Code. The Court concludes that the source of the funds in the 529 account is immaterial.

This should be a warning to grandparents and other relatives who want to contribute to a Section 529 Plan.  If the account owner files a Chapter 7 within two years of the contribution, you risk losing all or part of your contribution.   


Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.