As a parent or grandparent, you may want to encourage your family to value hard work and education. To help your family reach their full potential, you can set money aside to pay for their education.
One way to do this is through a 529 plan. Not only can a 529 plan help pay for education, but it can also be an integral part of your estate plan.
What is a 529 plan?
A 529 plan is an investment account with a named beneficiary such as your child or grandchild. The funds in a 529 can be used to pay for qualifying educational expenses without being taxed or endangering your child or grandchild’s eligibility for federal financial aid, should they seek it.
A 529 plan can be used for college expenses, but it can also be used for expenses related to professional or vocational schools as well as limited tuition for K-12 schools.
Making a 529 part of your estate plan
The beauty of a 529 is that it can complement your typical estate planning portfolio.
First, you can change 529 plan beneficiaries between members of the same family. For example, you can place funds in a 529 for your child. If that child does not use some or all of the funds, you can change the beneficiary to their sibling or a grandchild, benefiting other members of your family.
Second, you can experience tax advantages from gifting through a 529. In 2023, you can gift a person up to $17,000 annually without being taxed. The funds you invest into a 529 plan are considered a gift, so up to $17,000 contributed to a 529 are excluded from your taxes. Alternately, you may gift up to $85,000 (or $170,000 if you are married) upfront to a 529 plan without being subjected to a gift tax. This gift can be prorated over five years against your annual gift tax exemption. This lump sum contribution can kickstart—or “superfund”—the 529 by increasing capital gains over a longer period of time.
Third, you can include a transferable ownership provision in your 529, so you can fund the 529 and name a child as the successor owner to the account. Once you pass away, your child will take over ownership of the 529 and can continue contributing to it. In this way, the 529 can go on to fund education for generations.
A 529 is a good tool for funding your family’s education and is a beneficial part of any well-rounded estate plan. Contributing to a 529 plan can complement the security you ensure with your will, trust, advance medical directive, and power of attorney.