Do 529 Plans Belong in Your Estate Plan?

For many parents and grandparents, a 529 plan is viewed only as a college savings account. Money goes in, it grows for a child or grandchild, and eventually it helps pay education expenses.

But a 529 plan is also an asset with an owner, a beneficiary, and rules about who will control the account if the owner dies or becomes unable to manage it.  So in that way it is the same as a house, bank account, or retirement account.

That means it deserves a place in the estate planning conversation.

The Beneficiary and the Owner Are Not the Same Thing

One of the most important things to understand about a 529 plan is that the person who benefits from the account is not necessarily the person who controls it.

For example, a parent might establish a 529 plan for a daughter. The daughter is the beneficiary, but the parent remains the account owner.

The account owner generally decides how the funds are invested, when distributions are made, and, when appropriate, whether the beneficiary should be changed. Colorado’s CollegeInvest plans, for example, allow only one account owner and one beneficiary for each account.

That control makes the identity of the account owner an important estate planning issue.

What Happens When the Account Owner Dies?

This is the question that is easiest to overlook.

529 plans generally allow an owner to designate a successor account owner—someone who steps into the owner’s shoes when the owner dies.

For Colorado CollegeInvest accounts, an owner can name a successor account owner when establishing or updating the account. CollegeInvest specifically describes the successor as the person who assumes ownership upon the original owner’s death.

If no successor is named, CollegeInvest’s current rules provide the beneficiary becomes the account owner when the original owner dies. This may not be what the family wants.

Consider a parent who has:

• A revocable living trust providing that a child’s inheritance remains in trust until age 30; and
• A substantial 529 account for that same child.

The parents may have gone to considerable effort to decide who should manage money for the child if something happens to them. But if they never reviewed the successor designation on the 529 account, the account could operate very differently from the rest of their estate plan.

The problem is not necessarily that the beneficiary would someday own the account. The problem is that the result may occur by default rather than intentional design.

Choosing a Successor Requires More Thought Than You Might Expect

Naming the child’s other parent may be an obvious choice in many families.

In others, it may not be.

Blended families are a good example. A grandparent may establish a substantial 529 account for a grandchild but may not necessarily want the grandchild’s surviving parent, who is not their own child, to have complete control over that account after the grandparent’s death.

The same question arises when a family has chosen a particular person to manage trusts for children or grandchildren. It may make sense for the 529 succession plan to coordinate with that choice.

The important questions are:

• Who should control the account?
• Who should benefit from it?
• And what should happen if the original beneficiary does not need all of the money?

Those are estate planning questions, even though the asset happens to be called an education account.

What if the Child Doesn’t Use All of the Money?

Families sometimes hesitate to contribute heavily to 529 plans because they worry about “overfunding” the account.

529 plans have become increasingly flexible.

An account owner may often change the beneficiary to another qualifying family member. Depending on the circumstances, funds can also be used for a broader range of qualified educational expenses.

Federal law provides another option. Subject to several restrictions, certain unused 529 funds can be transferred directly to a Roth IRA for the beneficiary.

Among the requirements, the 529 account generally must have been open for at least 15 years, annual Roth IRA contribution limits apply, and the total lifetime amount transferred under this provision cannot exceed $35,000.

This does not mean every family should choose to overfund a 529 account. It does mean that having money left in the account is not necessarily a problem.

529 Plans Can Also Be Part of Estate and Gift Tax Planning

For families with larger estates, 529 plans can serve another purpose.

Contributions to a 529 plan are generally treated as completed gifts for federal gift and estate tax purposes even though the account owner retains substantial control over the account. CollegeInvest describes this as one of the estate planning advantages of a 529: assets contributed to the account can be removed from the contributor’s estate while the owner continues to control investments, withdrawals, and the beneficiary.

There are also special gift-tax rules that may allow a donor to make several years’ worth of annual exclusion gifts to a 529 plan at one time.

For grandparents in particular, this can make a 529 plan part of a broader wealth-transfer strategy rather than simply a way to save for tuition.

The tax rules can become complicated, however, particularly when large contributions or generation-skipping transfer tax issues are involved. Those situations should be coordinated with the family’s estate planning and tax advisors.

Don’t Forget Incapacity Planning

Death is not the only concern.

An account owner may also become unable to manage the account during life.

CollegeInvest, for example, permits an account owner to designate another individual to assume responsibility for certain accounts in the event of the owner’s death, legal incompetence, or inability to be located.

That makes 529 planning part of incapacity planning as well.

Just as we consider who will manage bank accounts, investments, businesses, and trusts if a client becomes incapacitated, we should consider who will be able to manage an education account.

A 529 Plan Should Be Part of Your Asset Alignment Review

We often tell clients that creating estate planning documents is only part of the job.

The next step is making sure their assets are aligned with the plan.

That means reviewing how assets are titled, reviewing beneficiary designations, and making sure that assets that pass outside the trust or Will still produce the result the client intended.

A 529 plan belongs on that list.

When reviewing a 529 account, consider:

• Who owns the account?
• Who is the beneficiary?
• Has a successor account owner been named?
• Is that still the right person?
• What should happen if the original beneficiary does not need all of the funds?
• Does the arrangement make sense with the trusts created for children or grandchildren?
• If the account owner becomes incapacitated, who can manage the account?
• For larger estates, should additional 529 contributions be considered as part of the family’s gifting strategy?

None of these questions is particularly complicated by itself.

But overlooking them can cause an account that was created with very good intentions to operate differently from the rest of the family’s estate plan.

A 529 plan may have started as a way to pay for college. Once a meaningful balance has accumulated, it should also be treated as what it has an asset that deserves its own place in the estate plan.

Bring This Information to Your Estate Plan Review

If you have a 529 plan, bring or send us the following information:

• Name of the 529 plan or provider
• Name of the account owner
• Name of the current beneficiary
• Name of the successor account owner, if one has been designated

We can then review whether the account is coordinated with the rest of your estate plan, including your trust, beneficiary designations, and plans for children or grandchildren.

The goal is simple: make sure the 529 account works the way you intend if you die or become unable to manage it.