California state laws governing debt collection may contain some harsh surprises for uninformed residents of California who expect their college savings to be safe from debt collection judgments. While federal bankruptcy law provides some protections against collections on college savings accounts, California's debt collection laws are not as protective in their scope. Many kinds of qualified higher education savings accounts are more vulnerable to collections, such as 529 College Savings Plans. California residents who wish to protect the assets they have set aside for the educations of loved ones have some options in estate planning to ensure that their wishes are fulfilled.
One of the simplest solutions for many California residents is to choose to gift the funds intended for education sooner than they originally planned. In this way, the assets are no longer in their name and cannot be pursued for judgment by creditors.
Another approach, although one with significant risks, is to gift the funds to a relative or close friend who is trusted, and who also lives in another state with protections for college savings accounts against creditor claims. Once the transfer is complete, the new owner of the funds can then establish a college savings plan for the originally intended recipient.
Those who do not prefer the risks and inflexibility associated with these first two approaches may find that they are well served by establishing an irrevocable trust. For instance, a parent might establish an irrevocable trust for his or her child's education, and then gift the funding assets for the trust to the trustee. The trustee would then establish the college savings plan for the child. Once the irrevocable trust is established, it is secured against creditors' claims.
An experienced estate planning attorney can help those with questions about how to provide for their loved ones find the solutions that work best for them.
Source: lakeconews.com, "Estate Planning: Protecting college savings from creditors," DENNIS FORDHAM, Aug. 27, 2016