Since Congress enacted §529 of the Internal Revenue Code in 1996 which, to over simplify things, allowed people to save tax free for college, these accounts have been a popular investment vehicle. Often they are funded by the parents but it is also not unusual to see accounts funded by grandparents.
When funded by grandparents, there is often a fight as to whether they should come “off the top” of the children’s college expenses or should be applied to the parent whose parents made the contribution. There is some validity to the latter argument because unlike UTMA or UGMA accounts that are technically owned by the children (and certainly when they reach the age or majority), the person who funds the 529 account is remains the owner, even though it is for the benefit of the child. The counter argument by the other parent is that (1) we were promised that these accounts were for the kids’ college and/or (2) we didn’t save for college because these accounts existed.
What happens when there is money left in a 529 account when the child is no longer in school? The law allows the funds to used for qualified educational expenses for another child. At a divorce, sometimes parents agree that the unused funds get split between them. Other people agree that they can go to the child. Obviously, there could be tax implications in either case.
What happens when a divorce agreement is silent regarding excess funds and the has to get involved. A mess can certainly ensue.
That is exactly what occurred in Herbert v. Herbert, an unreported (non-precedential) Appellate Division case decided on November 10, 2025.
In that case, the parties divorced in 2014. At the time. mom had set up (and was the owner of) 529 accounts for each of the children with money she inherited from her father, with approximately $81,000 and $67,000 in them, respectively. Mom also made a post-divorce contribution in the son’s account in the amount of $7,000. There was no discussion that marital funds were ever contributed to the account. There was no discussion that dad ever contributed any money to the 529 accounts.
When the parties’ son graduated in 2024, he had a surplus of more than $98,000 in the 529 for his benefit. In June 2024, mom filed a motion seeking to have dad pay his proportionate share of the daughter’s college expenses. Dad cross moved to have the son’s surplus be used to cover the daughter’s expenses. Mom opposed this saying that the funds should be used for the son’s potential graduate education.
It seems as though the 529 covered all of the son’s college expenses and most of the daughter’s, to date, with dad contributing a little more than $4,000 to the daughter’s education on one occasion.
At oral argument, mom’s lawyer argued that the surplus funds were funds created for the son’s benefit, should not be transferred for his sister’s education (though the law would allow for that), and that dad should pay his proportionate share. The trial judge noted, correctly, that the money does not belong to the son, and moreover, he had not even applied to graduate school and there was no indication that he would .
Here’s where the analysis went off the tracks. The trial judge said that he thought that the money should go back to the parties – though neither party sought that relief.
The trial court denied the request to use the money for the daughter because the parties’ MSA did not provide for it. The trial court’s order provided that the parties should divide the daughter’s college expenses 70-30. As to the son’s surplus, the court ordered that it be preserved for 2 years and if not used for the son during that time, that it be divided 50-50.
Mom appealed and the Appellate Division agreed that the Order regarding the division of the funds was in error, and reversed. In doing to, the Appellate Division first noted that:
“Before examining the court’s substantive order, we first address plaintiff’s claim that the court erred when it raised and resolved distribution of the surplus 529 funds should the parties’ son not ultimately utilize them for further education. We have reviewed the record, and we conclude the court mistakenly applied its discretion by deciding a matter not properly before it.
Our Supreme Court has long held that when neither party seeks a certain form of relief on a specific issue, it is improper for a trial court to “sua sponte” grant such relief as neither party has “notice” or an “opportunity to prepare a factual record to support or oppose” it. Grabowsky v. Twp. of Montclair, 221 N.J. 536, 541, 550 (2015); see also Sattelberger v. Telep, 14 N.J. 353, 363 (1954) (concluding courts of original jurisdiction cannot enter judgments that are not responsive to the pleadings before them).
Put another way, the trial court should not have decided an issue not before it – i.e. the division of the surplus funds.
The Appellate Division could have gone further and addressed the substance of the decision to distribute the surplus, but didn’t, sort of. Now, because they reversed on the procedural issue, they noted, correctly, that the did not have to address the substance.
But the opinion did not end there, and included perhaps a subliminal message or thumb on the scale of what could come next. Specifically, a big issue was whether the funds were ever marital funds which should have ever been divided since there seems to be no dispute that the 529s were funded with mom’s inheritance and were never put into dad’s name (and you can’t because you can’t have a jointly owned 529 to begin with.)
The Appellate Division noted, as follows:
“Concluding the court’s equitable distribution determination in paragraph five of the order was erroneous, we need not address plaintiff’s remaining arguments. We note only that the analysis of whether and to what extent these funds were marital assets subject to equitable distribution, and whether and in what relative amounts they should be distributed, if at all, necessitates a far more complex analysis than that conducted here, on notice and a far more fulsome record than that before the motion court.
To be subject to equitable distribution, property must be “legally and beneficially acquired” during the marriage. N.J.S.A. 2A:34-23(h)(1). Importantly, property must be excluded from equitable distribution if “acquired during the marriage or civil union by either party by way of gift, devise, or intestate succession.” N.J.S.A. 2A:34-23(h)(1). Here, it appears defendant did
not contribute to the children’s 529 accounts, the accounts were funded during the marriage exclusively by inheritance from plaintiff’s father, and plaintiff was the sole owner of those accounts. Further, plaintiff asserted she contributed to her son’s account post-FJOD.
Thus, the threshold question as to whether the 529 accounts were subject to equitable distribution, on this record, remained unresolved, as did any determination of arguable distribution percentages and amounts. See N.J.S.A. 2A:34-23.1 (setting forth a non-exhaustive list of factors courts must consider and requiring specific findings of fact on the evidence relevant to all issues pertaining to asset eligibility or ineligibility, asset valuation, and equitable distribution).
So maybe, even though they didn’t have to, the Appellate panel gave some friendly guidance to either help the parties resolve the matter or help the next trial judge who heard it.
But the takeaway is that things like whether surpluses in 529s can or should be used for other children and/or whether they should be divided are things that could have been addressed in the MSA to help limit post-judgment litigation.
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