How to Use a 529 Plan for Estate Planning
Looking for a trusted network of high-net-worth peers? Apply now to join Long Angle, a vetted community of high-net-worth investors, entrepreneurs, and professionals. Access confidential discussions, live events, peer groups, and private market deals.
Table of Contents
What is a 529 Plan?
Advantages of a 529 Plan for Estate Planning
How to Use a 529 Plan for Estate Planning
Considerations When Using a 529 Plan for Estate Planning
Best Practices for Incorporating a 529 Plan into an Estate Plan
What Happens to a 529 Plan When the Owner Dies?
Incorporating a 529 Plan Into Estate Planning
Estate planning for high-net-worth individuals requires a balance between minimizing tax burdens, preserving wealth, and ensuring that beneficiaries are adequately provided for.
While many investors focus on trusts, gifting strategies, and charitable donations, a 529 plan can be an effective—and often underutilized—estate planning tool. Despite being designed to facilitate tax-advantaged saving for educational expenses, a 529 plan for estate planning can also help investors reduce their taxable estate, grow wealth tax-free, and provide a meaningful financial legacy for future generations.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings account designed for educational expenses. It allows individuals to contribute post-tax dollars, grow investments tax-free, and withdraw funds tax-free for qualified education expenses.
Although 529 plans are traditionally used to save for college tuition, the 2017 Tax Cuts and Jobs Act and the SECURE Act of 2019 expanded the list of qualified expenses, which now includes K-12 tuition, apprenticeships, and even some student loan repayments.
Advantages of a 529 Plan for Estate Planning
For high-net-worth investors focused on preserving and transferring wealth, 529 plans offer several unique benefits:
Tax-Free Growth and Withdrawals: Contributions to a 529 plan grow tax-free, and distributions for qualified educational expenses are not subject to federal taxes. This makes z 529 plan an efficient way to grow wealth without the tax implications of other accounts.
Estate Reduction Through Contributions: Contributions to a 529 plan are considered completed gifts for tax purposes, reducing the size of the contributor's estate. For high-net-worth investors navigating estate tax considerations, this can be a way to reduce the taxable estate size.
Generous Contribution Limits: In 2024, individuals could contribute up to $17,000 per beneficiary without incurring a gift tax, while married couples could contribute up to $34,000 per year to a 529 plan. Moreover, a 529 plan allows for “superfunding,” a feature that enables individuals to contribute five years’ worth of annual gift exclusions upfront, amounting to $85,000 for individuals or $170,000 for married couples.
Control Over Assets: Unlike other types of gifts, the account owner retains control over 529 plan assets, including the ability to change beneficiaries, adjust contributions, and withdraw funds (with potential tax implications if the funds are not used for educational purposes). This flexibility makes the 529 plan ideal for high-net-worth individuals who want to maintain control over their assets while reducing their taxable estate.
How to Use a 529 Plan for Estate Planning
For high-net-worth investors, there are several ways to use a 529 plan as part of a broader estate planning strategy.
529 Plans for Multiple Beneficiaries
One of the most effective strategies for high-net-worth investors is to “superfund” 529 plans for multiple beneficiaries. By contributing the maximum five-year gift tax exclusion amount in one year, investors can make substantial contributions that reduce their estate while avoiding gift taxes. This strategy is particularly advantageous for those with multiple children, grandchildren, or other family members who may benefit from educational funding.
For example, a married couple with four grandchildren can contribute a total of $680,000 across multiple 529 plans in a single year, taking full advantage of the superfunding provision. This not only provides substantial tax-free growth potential but also removes a significant amount from the couple’s taxable estate.
Creating a Legacy of Education Funding
Using a 529 plan to create an educational legacy can be a meaningful way to transfer wealth. By funding 529 plans for grandchildren, great-grandchildren, and future generations, investors can ensure that their legacy supports education while also providing estate planning benefits.
In cases where a child or grandchild does not need all of the funds in their 529 plan, account owners can transfer the remaining funds to another family member or even skip generations by changing beneficiaries. This strategy allows families to continue growing wealth tax-free and to make a lasting impact on the educational future of their heirs.
Hedging Against Rising Educational Costs
A 529 plan can provide a hedge against the rising costs of education. Given that tuition and other educational expenses continue to increase, funding 529 plans early ensures that beneficiaries have adequate resources to meet future costs. For estate planning purposes, this can be an effective way to direct wealth toward education without the unpredictability of traditional investment accounts.
Additionally, 529 plan funds can now be used for a wider variety of educational expenses, such as K-12 education, trade schools, and apprenticeships. This flexibility allows high-net-worth investors to provide for family members at different educational stages, broadening the 529 plan's usefulness as an estate planning tool.
Funding a 529 Plan in a Trust
For families with complex needs or those who want to retain tighter control over assets, a trust-funded 529 plan may be a suitable option. By creating a trust with provisions for educational funding through a 529 plan, investors can ensure funds are distributed for educational purposes only, as specified in the trust documents.
This approach allows high-net-worth investors to outline specific conditions and retain more control over how the funds are used while still reaping the estate tax benefits of a 529 plan. It is advisable to consult with an estate attorney to structure the trust appropriately; 529 plans within trusts can have different tax and contribution implications compared to traditional accounts.
High-Net-Worth Income & Spending Report
Long Angle's annual High-Net-Worth Income and Spending report analyzes income sources, expenses, savings strategies, and spending behaviors of high-net-worth households.
Considerations When Using a 529 Plan for Estate Planning
While 529 plans offer compelling advantages, high-net-worth investors should also consider the potential risks and limitations when incorporating them into their estate planning strategy.
Non-Qualified Withdrawals and Tax Penalties
Funds withdrawn from a 529 plan for non-qualified expenses are subject to income tax and a 10% penalty on earnings. Although account owners retain control over the 529 plan, any withdrawals for non-educational purposes can erode its tax-advantaged benefits. For high-net-worth investors, this may not be a pressing concern, but it is still essential to plan accordingly.
Generation-Skipping Transfer Tax (GSTT)
When using a 529 plan to benefit grandchildren or more distant generations, the Generation-Skipping Transfer Tax (GSTT) may apply if contributions exceed the annual exclusion limit. Careful structuring of contributions and beneficiary changes can help minimize GSTT liability.
Impact of Legislative Changes
As with any tax-advantaged investment vehicle, 529 plans are subject to changes in tax laws. Investors should remain aware of any legislative changes that may affect contribution limits, qualified expenses, or tax treatment. Regular review of one’s estate plan and 529 plan strategy with an estate planner or financial advisor is advisable to ensure the strategy remains aligned with current laws and regulations.
Best Practices for Incorporating a 529 Plan into an Estate Plan
To optimize a 529 plan as an estate planning tool, high-net-worth investors may want to follow these best practices:
Consult with Estate and Tax Professionals: The estate planning implications of a 529 plan can vary depending on individual circumstances. Working with a team of advisors ensures that the plan aligns with an investor’s overall estate strategy.
Review and Adjust Beneficiary Designations: Account owners should periodically review and update beneficiaries on 529 plans to reflect changing family needs and goals. This may involve reallocating unused funds to younger generations or other family members.
Funding Separate 529 Plans for Each Beneficiary: Establishing multiple 529 accounts can help compartmentalize educational funding for each family member.
Stay Informed on Legislative Developments: Tax laws affecting 529 plans can change. Stay current on relevant updates to maintain a plan’s effectiveness as an estate planning tool.
What Happens to a 529 Plan When the Owner Dies?
A 529 plan will include terms that dictate who takes over the account when the owner passes. Generally, the 529 contributions will go to the estate of the designated beneficiary as long as they are at least 18-years-old and a U.S. citizen or permanent resident.
In cases where no successor is named, the 529 plan account might go to the owner’s spouse, but it generally becomes part of the deceased owner’s estate, potentially triggering probate and complicating the estate settlement process. This can delay the account’s accessibility and impact the beneficiary’s ability to withdraw funds for educational expenses. Additionally, when the account becomes part of the estate, it may be subject to estate taxes, depending on the estate’s overall value and the applicable estate tax exemptions.
If an estate becomes the default owner of a 529 plan, the estate executor may have the authority to name a new account owner, though this process may be time-consuming and require court involvement. As such, it is important for 529 account owners to establish a successor when setting up their 529 plan.
Incorporating a 529 Plan Into Estate Planning
For high-net-worth investors, a 529 plan for estate planning is an underutilized but powerful tool. By reducing taxable estate size, providing tax-free growth, and creating a lasting educational legacy, a well-structured 529 plan can support both financial and legacy goals. From superfunding accounts to establishing trusts, there are numerous ways to take advantage of the unique benefits of a 529 plan in estate planning.
Long Angle’s community of high-net-worth individuals has an open forum for members to discuss topics such as estate planning, wealth management, parenting, and more. Gathering insights from other high-net-worth individuals can be incredibly helpful in making connections and learning how to manage wealth. Members also get access to events, peer groups, and investment opportunities. Apply here to get started.
Looking to expand your investment network?
Join Long Angle, a private community of high-net-worth investors. Together, we leverage our collective expertise and assets to access, diligence, and underwrite institutional-quality alternative investments.
