In our most recent Wealth Management Insights publication, Charissa Anderson, CFP®, CDFA®, explained why it is important to name a successor owner for a 529 account and discussed gift and estate tax implications relating to the account.
by Charissa Anderson, CFP®, CDFA
Senior Vice President
Portfolio and Wealth Management
ENSURING CONTINUITY IN 529 PLANS
A 529 account is tax-advantaged savings plan that allows you to save for future education expenses. You can choose from various investment options and enjoy tax-free growth and withdrawals for qualified education costs.
All 529 plans have an account owner and a beneficiary. The beneficiary is the student for whom the funds will be used in the future. The account owner is the adult who opens the account and is often a parent or grandparent. Although funding a 529 account is considered a completed gift to the beneficiary, the account owner, not the beneficiary, maintains control over the account. This includes the ability to determine how the assets are invested, take distributions and change the beneficiary to another family member.
Just as it is important to have named beneficiaries on your financial accounts, it is also important to name a successor owner for your 529 plans. If a 529 account owner passes without a named successor, the state’s 529 plan rules will determine who becomes the new account owner. The account may be subject to probate and will generally pass according to the original owner’s will, or through the state’s intestacy laws if there is no will. In many cases, if the beneficiary is 18 years or older, they will become the new 529 account owner, giving them full control over the assets.
Conversely, naming a successor owner avoids probate and allows for a seamless transition of the account. The successor owner can step into the management of the 529 account in the event of the original account owner’s death or incapacity, without delay. The new owner assumes the same rights as the original owner, including the ability to take a distribution of the full account balance (subject to taxes and penalties) and the right to change the beneficiary. For this reason, the account owner should select a successor they fully trust to follow their intentions.
If the account owner does not feel comfortable passing ownership to another individual, or they would like more control over how the 529 account is used, naming a trust may be beneficial. The terms of the trust can outline how the funds were intended to be used. For example, the trust language could state the funds are only to be used on higher education costs, and not to be used for personal expenses. If a trust is named, it is important the owner works with their estate planning attorney to ensure the necessary provisions are included in the trust document.
Tax Considerations
Contributions to 529 plans are considered gifts for tax purposes. In 2024, you can give up to $18,000 per recipient without triggering gift tax. The funds contributed to a 529 plan are also removed from the donor’s estate, making them attractive estate planning tools. Because of this, upon the death of the owner, the value of the 529 account is generally not included in his or her estate. Rather, the value of the account is included in the beneficiary’s estate. There is an exception, however, if the account was “super-funded.”
“Super-funding” a 529 plan allows you to contribute five years’ worth of “annual gifts” into a 529 plan in a single year without gift-tax consequences. Individuals, such as parents or grandparents, can contribute up to $90,000 and treat the contribution as if it were made over five consecutive years. If this five-year election was made, and the donor died before the five-year period ended, a prorated portion of the contribution is included in the donor’s estate.
Due to its many benefits, 529 plans are often the best choice for education savings. Having a successor owner named on the account can bring peace of mind that the 529 account will continue to be managed as you intended. If you have questions about education funding plans or successor owner considerations, contact your portfolio manager.
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