A 529 plan is a state-sponsored tax-advantaged plan designed for saving for future education expenses authorized by Section 529 of the Internal Revenue Code. If used for education, the assets grow tax-free. According to the College Savings Plan Network, since 529 plans came into existence in 1996, they have grown to $425.2 billion in 14.83 million accounts.

There are two types of 529 plans, pre-paid tuition plans, and education savings plans. Pre-paid tuition plans allow the account owner to purchase credits for later use at participating colleges or universities to pay for tuition. Education savings plans tend to be more popular since the federal government guarantees them (but not against loss due to the investment’s performance). Education savings plans utilize an investment account to save for the beneficiary’s future qualified higher education expenses, including room and board, fees, and qualified equipment expenses. 529 plans are used in every state to pay for K-12 education expenses at private schools.

Now, 529 plans are becoming popular in estate planning thanks to the 2017 tax reform act. Under the act, an individual contributing to a 529 savings plan can frontload at least $235,000 (or five years’ worth of contributions) into one year without incurring federal gift taxes. This limit is still in force for 2021, making the use of a 529 plan a viable estate planning strategy for benefactors. However, some states have limits on the maximum amount of $235,000, while other states allow more contributions. In 2020, the CARES Act extended the use of 529 plans for estate planning purposes, making 529 plans a strategy investors may want to consider.

A married couple, who are grandparents, could contribute through their estate plan into their grandchild’s 529 plan. It’s a unique way for those who wish to make education a part of their estate plan legacy that allows them a tax deduction and no federal gift taxes. This strategy can be used within an estate plan for each child or grandchild. Another feature of this strategy is the contributor/account owner retains control of the assets and rights to the dollars in the 529 plan inside their estate plan.

Changing the beneficiary of a 529 account held inside an estate or trust can breach the trust, and caution is advised. 529 plans allow the contributor/account owner to change the beneficiary of the account at any time. However, if the 529 plan is used inside a trust or as part of an estate plan, changing the beneficiary can have adverse effects if someone contests the trust or estate plan. Therefore, due diligence in using a 529 plan as part of estate planning should involve a financial professional, attorney, and tax professional. There are many 529 plans sponsored by various states, so research to find one that meets your expectations and needs.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

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