A substantial new California exemption snuck into law in 2021, the college savings account exemption.
It protects 529 college savings accounts from the creditors of parents. The exemption applies in all California collections and to California bankruptcies when the CCP 704 exemptions are selected.
The eyeopener is that a parent (or other donor) can contribute the amount of the federal gift tax exclusion each year to an account for each child. That exclusion is currently $16,000 a year.
For a current client, that means he can convert his non exempt brokerage account to a college account of $16,000 for each of three kids. The money grows tax free for the kids’ education, safe from their parents’ financial difficulties
This exemption covers exclusively Golden State ScholarShare accounts, governed by the Education Code, beginning at 69980 .
The exemption is found at CCP 704.105.
Contrasting bankruptcy provisions
The Bankruptcy Code has a like-minded provision in 541(b)(6) that excludes 529 accounts from the bankruptcy estate. But it limits the exclusion to funds deposited more than a year before any bankruptcy filing. Contributions in the year before the year of filing are further limited to $7575, as of 2022. That number is adjusted every three years for inflation.
The bankruptcy exclusion is available to filers living anywhere, whereas the exemption for Golden State ScholarShare accounts is exclusive to California.
So, in California, bankruptcy law includes recent contributions in the bankruptcy estate, and the college savings account exemption pulls those contributions back out of the estate.
529 has double benefits
Saving for college is an obvious good, just as obviously as student loans can blight a student’s life. Like retirement savings accounts, the money grows tax free. So even parents who don’t face financial risks benefit.
But the standout for me, as a bankruptcy lawyer, is that ScholarShare accounts insulate college savings from the risks of parents being in business. Even when the parents’ financial life takes a nose-dive, the kids still have resources for higher education.
