A 529 plan—sometimes called a “qualified tuition plan,” or QTP—is a special investment account that offers significant tax advantages when disbursements are used to pay for education expenses. A 529 plan could be used to pay for a designated beneficiary’s:
- Private primary or secondary schooling
- College tuition
- Graduate research
- Apprenticeship programs
- Student loan repayment
In many respects, 529 plans are similar to Roth IRAs. When you deposit money into a 529 account, the investment grows on a tax-deferred basis. However, 529 plans—while intended for use by a beneficiary—can double as an estate planning tool, too.
529 Plans and Estate Planning
A 529 plan is an investment savings account. The owner of a 529 account can send money for qualifying expenses to themselves, the beneficiary, or the school. Although 529 plans do not transfer assets after death and do nothing to avoid probate, they can still serve as important estate planning tools. This is because:
- Any 529 contribution up to $16,000 will not be counted against the donor’s annual or lifetime gift and estate tax exemptions.
- Deposits into a 529 plan are not considered part of the owner’s taxable estate and will not be probated.
- 529 contributions can decrease the value of the taxable estate and help owners with a high net worth reduce or eliminate their federal estate tax obligation.
Who Can Open a 529 Plan
529 plans are often started by parents and grandparents. However, anyone can open and fund a 529 plan for someone else, including family friends and other non-relatives. In fact, the owner of a 529 plan can name themselves as a beneficiary.
Once money is deposited into a 529 plan, it can be kept there indefinitely. There is no “age limit” for 529 withdrawals and disbursements. However, any withdrawal is subject to federal taxation unless it is used for qualifying educational expenses.
Do You Have Questions About Your 529 Plan?
529 plans can help some families with a high net worth offset or eliminate federal estate taxes. However, they are not the best savings option for everyone. Compared to other estate investments, 529 plans regularly underperform and offer less-than-ideal ROIs.
A 529 plan can help fund and transform a child’s future; however, just like any other savings strategy, it should be part of a more comprehensive estate plan.
The Law Firm of Kavesh, Minor & Otis, Inc. has spent decades helping Californians identify and create their ideal estate plans. If you are considering funding a 529 plan, we could help you, too. Please send us a message online, or call us at 1-800-756-5596 to schedule your initial consultation.