Mark Stevens, CFP®
mark@wealthcarenetwork.org
 
 




529 Plans and Estate Planning

Did you know ...

  • If your grandchild doesn't go to college or gets a full scholarship, you can name another grandchild as beneficiary of your 529 account with no penalty.
  • Many states offer income tax deductions for contributions to their 529 plan.
  • In addition to college and graduate school, money in a 529 savings plan can be used for K-12 expenses, up to $10,000 per year

Note

Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer's official statement. There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.

 

529 Plan Basics

Section 529 plans are governed by federal law (section 529 of the Internal Revenue Code) but are sponsored by states and, less commonly, colleges. Each plan may have slightly different features, but each must conform to the federal framework. There are two types of 529 plans — savings plans and prepaid tuition plans.

Each type of 529 plan has an account owner, who is the person who opens the account, and a beneficiary, who is the person for whom contributions are being made. The account owner has the flexibility to make contributions to the account, request withdrawals from the account, change the investment selections for the account (for savings plans only), and change the beneficiary of the account. People of all income levels are eligible to open an account.

Grandparents can open a 529 account and name their grandchild as beneficiary (only one person can be listed as account owner), or they can contribute to an already established 529 account.

529 savings plans

529 savings plans are the more popular type of 529 plan; nearly all states offer one or more of these plans. A 529 savings plan functions like an individual investment-type account, similar to a 401(k) plan. You select one or more of a plan's investment portfolios, and you either gain or lose money, depending on how those portfolios perform. Funds in the account can be used to pay the full cost of tuition, fees, room and board, books, and supplies at any accredited college or graduate school in the United States or abroad. Funds can also be used to pay K-12 tuition expenses, up to $10,000 per year. Most 529 savings plans have lifetime contribution limits of $350,000 and up (limits vary by state).

529 prepaid tuition plans

By contrast, a prepaid tuition plan pools your contributions with the contributions of others, and in return you get a predetermined number of units or credits that are guaranteed to be worth a certain percentage of college tuition in the future (in effect, you are paying future tuition with today's dollars). Funds in a prepaid tuition plan can only be used to cover tuition and fees at the limited group of colleges that participate in the plan, which are typically in-state public colleges. Prepaid tuition plans are generally limited to state residents, whereas savings plans are open to residents of any state.

Grandparent as account owner

A grandparent isn't required to be the account owner of his or her grandchild's 529 plan to make contributions to the account. But if the grandparent is the account owner, there are some additional considerations.

First, as account owner, a grandparent can retain some measure of control over his or her contributions by changing investment selections, authorizing account withdrawals for both education and non-education purposes, or even closing the account. A grandparent will have this control over these contributions even though they generally aren't considered part of his or her estate for tax purposes — a rare advantage in the estate planning world. However, funds in a grandparent-owned 529 plan can still be factored in when determining Medicaid eligibility, unless these funds are specifically exempted by state law.

Second, regarding financial aid, a grandparent-owned 529 account does not need to be listed as an asset on the federal government's aid application, the FAFSA. However, distributions (withdrawals) from a grandparent-owned 529 plan are reported as untaxed income to the beneficiary (grandchild), and this income is assessed at 50% by the FAFSA. By contrast, a parent-owned 529 plan is reported as a parent asset on the FAFSA (parent assets are assessed at 5.6%) but distributions from a parent-owned 529 plan aren't counted as student income.

To avoid having a distribution from a grandparent-owned 529 account count as student income in a way that could negatively affect financial aid, one option is for the grandparent to delay taking a distribution from the 529 account until anytime after January 1 of the grandchild's junior year of college (because the FAFSA won't need to be submitted again). Another option is for the grandparent to change the owner of the 529 plan account to the parent.

Colleges have their own rules when distributing their own financial aid. Most colleges require a student to list any 529 plan for which he or she is the named beneficiary, so grandparent-owned 529 accounts would be treated the same as parent-owned accounts.




This communication is strictly intended for individuals residing in the state(s) of GA. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019.