How Can a 529 College Savings Plan Work with My Estate Plan?


Part of any estate plan is weighing options for investment of assets through the lens of passing them to others. After all, a will or a trust is essentially a plan for providing your money or property to another person.

A 529 college savings plan can fit squarely into your plans, so long as you understand its advantages and limitations.  In a recent article titled “529s and Estate Planning: What’s the Connection?” the Cary Citizen (North Carolina) set the boundaries and uses of a 529 plan clearly.

First, it’s important to understand what a 529 plan is and how it functions. State governments sponsor 529 plans to foster investment for children or relatives’ college tuition. Most plans are built around mutual funds with allocations of assets based on the age of the expected beneficiary. The older the child gets, the less risky the allocation of the 529 plan investment. Some portfolios also have static allocations that don’t change with the market or the age of the plan.

Withdrawals from a 529 plan do not incur federal tax, and in most states no state tax either if they are used to pay for qualified college expenses. Any other withdrawals will have income tax applied with a 10% additional federal tax on top.

So far, so straightforward. The government wants individuals to invest in their children’s educations and incentivizes setting money aside. The estate planning advantages are based on the rules for contributions.

Money contributed to a 529 plan is treated as a gift from the contributor to the named beneficiary of the account. In many estate plans, the biggest question for an individual is how to pass assets to others or to encumber assets such that Medicaid does not count them as within the individual’s control. This is often referred to as “spend down.”

A 529 plan can act as a place to spend down your income as you plan for retirement or to set aside assets you intended to pass in a way that is efficient economically. Each year, you may contribute a maximum of $14,000 to a 529 plan per beneficiary without triggering federal gift tax. Married couples can contribute twice that amount per year if they contribute jointly.

This means you can take money that you were intending to set aside for children or grandchildren in another form (whether by gifting, via will, via trust, or otherwise) and place it into 529 plans for each beneficiary and begin to spend down for your retirement. For example, if you are married and had five minor grandchildren, you and your spouse could contribute $28,000 to a 529 plan for each grandchild, for a total of $140,000 per year!

In addition, if you come to this strategy later in life, or simply don’t wish to tie up assets earlier in life, the IRS allows a catch-up mechanism in which you make all of your yearly allowance for gifts to 529 plans for the next five years at once. Meaning, you could contribute $70,000 per beneficiary in one year or $140,000 per beneficiary as a married couple contributing jointly.

Once used, the catch-up contribution blocks you from contributing more to the 529 plans for that specific beneficiary for the rest of the five-year period. In addition, if you pass away in that five-year period after making a catch-up contribution, the IRS may consider a portion of the gift part of your estate proportionally to the amount of the five-year period left.

A 529 plan serves to help family members to pay for college education and associated expenses, but it also can help the contributor as an estate planning tool. At Van Dyck Law Group, we are familiar with this and other tools to help you make an estate plan in New Jersey that fits your needs and wishes. Give us a call at 609-580-1044 to schedule a consultation.

Reference: Cary (NC) Citizen (October 31, 2018) “529s and Estate Planning: What’s the Connection?”