While there are many different ways to save money for education, 529 accounts are widely regarded as the best. Not surprisingly, questions about how to manage 529 accounts are an increasingly important estate planning topic. This three-part series offers an overview of 529 accounts from an estate planning perspective, start to finish! In Part 1, you will find answers to what a 529 account is, how and where to open a 529 account and who should own the account. In Part 2, you will gain insight into who can contribute to a 529 account, options and considerations in gifting to a 529 account, how 529 accounts are invested and practical pointers for actually using the 529 account to pay for eduction. In Part 3, you will find answers regarding the income tax consequences of distributions and estate tax treatment of a 529 account, the impact of a 529 accounts on a beneficiary’s eligibility for financial aid, whether you can change the beneficiary and alternatives to a 529 accounts. Read on to learn all about these accounts, and please contact Elizabeth Bawden or your Withers estate planning attorney with any related questions.
What is a 529 account
Section 529 is the Internal Revenue Code provision for qualified tuition programs designed to encourage and incentivize saving for education. 529 accounts are income tax free, meaning that educational savings grow at a faster rate than taxable savings (similar to Individual Retirement Accounts). Some states magnify these benefits by offering their residents state income tax benefits for contributions to 529 accounts (California is not one of them). Each 529 account has one named beneficiary: the student whose education is to be paid for.
How and where to open a 529 account
529 accounts can be opened directly with plan sponsors (individual states), or through investment advisors (who then utilize a state’s plan). Any state’s plan is available to use regardless of residence, but some states offer state tax benefits to resident contributors or beneficiaries, while others charge higher fees for beneficiaries who are not residents. To determine where to open the account, start by considering whether any plans offer tax advantages to state resident contributors or beneficiaries, and whether it will be easier to manage the accounts directly or through an existing investment advisor. Fees relating to 529 accounts vary by plan but are generally higher when opened through an investment advisor. Working with an investment advisor may, however, increase certain administrative efficiencies and provide personalized investment guidance. An excellent resource for selecting and opening 529 accounts is www.savingforcollege.com . Once a 529 account is opened, it may be moved from one plan to another up to once every 12 months, so long as the beneficiary remains the same.
Who should own a 529 account
The owner of a 529 account controls the account. Often, the person who opens and initially contributes to the account is the owner, though this is not required. The identity of the owner has implications for financial aid (to be discussed in Part 3), and because the owner has broad management powers choosing someone who will act in the best interests of the beneficiary is paramount. An important part of estate planning is making sure that each 529 account names a successor owner, who will manage the account upon the initial owner’s death or incapacity. While a trust can be the owner of a 529 account, this generally requires the addition of specific provisions to the trust to enable the trustee to manage and use the account for the beneficiary. Generally, it is more practical for individuals (rather than trusts) to own 529 accounts.
Part 2: Estate planning with 529 educational savings accounts
Part 3: Estate planning with 529 educational savings accounts