A 529 plan is a state-sponsored tax-advantaged plan designed for saving for future education expenses that are authorized by Section 529 of the Internal Revenue Code. If used for education, the assets grow tax-free. Since 529 plans came into existence in 1996, they have grown to $328 billion in 31.1 million accounts according to Strategic Insight.
There are two types of 529 plans, pre-paid tuition plans and education savings plans. Pre-paid tuition plans allow the account owner to purchase credits for later use at participating colleges or universities to pay for tuition. Education savings plans tend to be more popular since the federal government guarantees them (but not against loss due to the investment’s performance). Education savings plans utilize an investment account to save for the beneficiary’s future qualified higher education expenses, including room and board, fees, and qualified equipment expenses. 529 plans can now be used in every state to pay for K-12 education expenses at private schools.
Now, 529 plans are becoming popular in estate planning thanks to the 2017 Tax Reform Act. Under the act, an individual contributing to a 529 savings plan can frontload $75,000 (or five years’ worth of contributions) into one year without incurring federal gift taxes. A married couple, who are grandparents, could contribute $150,000 into their grandchild’s 529 plan. It’s a unique way for those who wish to make education a part of their estate plan legacy that allows them a tax deduction and no federal gift taxes. The bonus is that this can be for each child or grandchild. Another positive feature is the contributor/account owner retains control of the assets and rights to the dollars in the 529 plan inside their estate plan.
Changing the beneficiary of a 529 account held inside an estate or trust can breach the trust and caution is advised. 529 plans allow the contributor/account owner to change the beneficiary of the account at any time. However, if the 529 plan is used inside a trust or as part of an estate plan, changing the beneficiary can have adverse effects if the trust or estate plan is ever contested. Therefore, due diligence in using a 529 plan within estate planning should involve an investment professional, attorney, and tax professional. There are many 529 plans sponsored by various states, research to find one that meets your expectations and needs.
