A 529 plan is a savings tool that is typically used to save for a child or grandchild’s education expenses. Apart from parents and grandparents, other individuals like uncles, aunts, etc., can also use it. These plans offer tax-free growth and tax-exempt withdrawals when used for qualified education expenses, which makes them an attractive option for covering future schooling costs. Withdrawals for education purposes are not subject to federal or state taxes, and for K–12 students, you can withdraw up to $10,000 per year tax-free. In some states, contributors may even qualify for additional state tax benefits. These features make a 529 plan ideal not only for education planning but also for estate planning. A 529 plan can be an excellent estate planning tool if used properly.
A financial advisor can help you understand the role of a 529 plan in estate planning. This article will also offer insights into how a 529 plan can fit into your estate plan.
Incorporating a 529 plan in estate planning
A 529 plan can be an estate planning tool with several advantages. All you have to do is open an account, name a beneficiary, and contribute to the plan. Over time, your funds will grow, and the plan can become a simple yet effective way to pass on wealth. Let’s take a closer look at some of the perks of using a 529 plan in estate planning:
1. Federal tax benefits
529 education plans are funded with your after-tax dollars. However, the earnings in a 529 plan grow on a tax-deferred basis. You do not pay taxes on the growth that your funds earn over the years. Additionally, it is entirely tax-free when the money is withdrawn for qualified educational expenses, such as college tuition, K–12 schooling (up to $10,000 annually), or vocational training. This combination of tax-deferred growth and tax-free withdrawals not only makes 529 plans an excellent choice to save for education expenses but also for passing on your estate to your heirs.
Are 529 plans included in taxable estate? No, in fact, a 529 plan can considerably lower the taxable value of your estate. When you contribute to a 529 plan, the funds are considered completed gifts to the beneficiary. This offers two primary advantages. Firstly, you remain in control of the account. Secondly, the money is technically out of your estate when taxes are computed. As a result, the contributions you make, and the subsequent growth of those funds will not be counted when determining your estate’s value for taxation.
If you have a large estate and are likely to incur high estate tax, a 529 plan can be a brilliant way to reduce your estate tax liabilities. The account allows more of your wealth to go directly to your loved ones, as the funds can be passed on to beneficiaries without triggering taxes.
2. Flexible ownership
Unlike irrevocable trusts or other financial gifts, where you lose authority over the funds once they are transferred to the beneficiary, a 529 plan gives you complete control and ownership of the account. As the account owner, you can decide how the funds are used and make changes along the way to meet your family’s needs. For families with many members, a 529 plan can be used to pass on wealth to those other than your intended beneficiary, too. A 529 plan offers flexible ownership. Because you can change the plan’s beneficiary at any time, it allows you to align your savings with the educational needs of various family members. This can be useful in estate planning, as you get to use the plan to distribute assets across generations.
If the original beneficiary decides not to pursue higher education or receives a full scholarship, the account owner can transfer the plan to another eligible family member, such as other siblings, nieces, nephews, cousins, grandchildren, or even parents, without triggering penalties. This ensures that the funds saved are not wasted and can be used by someone who truly needs them. Imagine a scenario where you saved your children’s education in a 529 plan. One child receives a full scholarship, leaving the funds unused. Instead of withdrawing the money and facing penalties, you can transfer the plan to another child, grandchild, or other members pursuing higher education or attending a vocational program. This way, your savings can support your family’s educational goals without unnecessary taxes and penalties. Moreover, the plan will retain its tax advantages as long as the funds are used for qualified educational expenses.
Do note that you can also use the money for yourself. Say nobody in your family uses the money for education. In such a case, you can withdraw the funds for your financial needs. Keep in mind that since this would be a non-qualified withdrawal, it will trigger income taxes on the earnings portion and a 10% penalty. Despite this, the ability to access funds can offer you flexibility and peace of mind. You can use the money for retirement, buying a house, or simply enhancing your lifestyle.
3. State-wise tax advantages
529 plans not only offer federal tax benefits but can also provide state-level tax advantages that can enhance estate planning. Many states offer tax deductions and credits for 529 contributions. However, these benefits depend on where you live. For instance, nine states, including Florida, Nevada, Alaska, South Dakota, Tennessee, Texas, New Hampshire, Washington, and Wyoming, do not impose state income tax and, therefore, do not offer any tax deductions for 529 plan contributions. Similarly, California, Hawaii, and Kentucky assess state income tax but do not provide any tax deductions or credits for contributions to a 529 plan. On the other hand, many states offer attractive incentives. Alabama allows single filers to deduct up to $5,000 in contributions annually, while joint filers can deduct up to $10,000. Indiana provides a 20% tax credit on contributions, capped at a maximum credit of $1,500 per year. New Jersey provides a tax deduction of $10,000 per taxpayer, making it one of the more appealing states for 529 contributions. Kansas offers a smaller, yet still beneficial, tax credit of $150 for single filers and $300 for joint filers. However, it is essential to note that state benefits can vary widely. For instance, residents of states with no income tax will not see state-level deductions but can still enjoy federal benefits, including tax-free growth and withdrawals for qualified educational expenses.
529 plans also have high aggregate contribution limits, which typically range between $235,000 and $550,000 per beneficiary, depending on the state. This makes them suitable for setting up tax-advantaged savings while reducing your estate’s taxable value over time. Once the aggregate limit is reached, no further contributions can be made, but the account continues to grow through investment earnings. This helps you maximize the plan’s potential without worrying about ongoing contributions. Moreover, contributions to a 529 plan can also help you reduce state-level estate or gift taxes. You can transfer funds into a 529 plan and shift wealth out of your estate while retaining control of how the funds are used. Consulting with a financial advisor or an estate planning attorney can help you understand the tax rules in your state so you can use a 529 plan more effectively.
4. No Generation-Skipping Transfer (GST) tax
The GST tax prevents individuals from transferring wealth directly to their grandchildren or younger beneficiaries while avoiding federal estate taxes. This tax applies to gifts or inheritances passed to beneficiaries who are at least 37½ years younger than the donor, excluding spouses.
A 529 plan can help you eliminate GST tax concerns. These plans enable you to transfer wealth across generations, such as to grandchildren while bypassing immediate heirs. Not only does this help reduce the tax burden on larger estates, but it also ensures that your assets are passed on efficiently, and in a tax-advantaged manner.
5. No inheritance tax
Another benefit of using a 529 plan in estate planning is that beneficiaries may have the opportunity to exclude these accounts from state inheritance taxes, depending on the state and their relationship to the donor. Generally, close family members like children or grandchildren benefit from lower inheritance tax rates or even tax exemptions compared to more distant relatives who may be beneficiaries. Each state has its own rules, which are often based on the relationship between the deceased and the inheritor. Based on the relationship to the account holder, the state determines whether any inheritance tax applies and at what rate. In some states, funds in a 529 plan are specifically exempt from inheritance tax when passed to children or grandchildren. Certain states, like Pennsylvania, exempt in-state 529 plans from inheritance tax. However, plans from out-of-state may not be exempted.
6. Annual gift tax exclusion
While 529 plans have no specific annual contribution limits, your contributions are governed by federal gift tax rules, which makes them a useful tool for tax-efficient wealth transfer. In 2024, contributions up to $18,000 per beneficiary and $36,000 for married couples qualify for the annual gift tax exclusion. So, you can contribute up to these amounts without incurring any gift taxes. In 2025, this annual exclusion increases to $19,000 for individuals and $38,000 for couples.
A 529 plan also offers the option to superfund an account. This can be done through the five-year election. The superfund provision allows you to contribute up to five times the annual gift tax exclusion in a single year. This amounts to a total of up to $90,000 in 2024 and $95,000 in 2025. You can contribute up to these amounts without triggering any gift taxes. Married couples can double these amounts and contribute up to $180,000 in 2024 or $190,000 in 2025 per beneficiary. While this strategy can be beneficial for families looking to transfer a substantial amount of wealth quickly without incurring immediate gift tax implications, there are some things you must follow. When using the five-year superfund option, it is essential to note that you cannot make any additional gifts to the same beneficiary during the covered five-year period without potentially triggering gift taxes. For instance, if you superfund $95,000 in 2025, any other gifts to that beneficiary during the following five years will count against your lifetime gift tax exemption. The lifetime gift tax exemption limit has been increased to $13.99 million in 2025, up from $13.61 million in 2024.
Nevertheless, this super funding option makes it easier for families to transfer large sums of money to the intended heir without incurring taxes. Moreover, these funds continue to grow tax-free over time, maximizing their value for future educational expenses. Additionally, as the account owner, you still retain most of the control. So, if you wish to change the beneficiary in the future or use the funds for your own needs, you can do so.
Things to keep in mind when using a 529 in estate planning
Make sure to name a successor
Account owners need to name a successor for the 529 plan. This will ensure that the account does not go through probate upon the account owner’s demise. Probate can be a costly and lengthy affair. It can put families through a lot of emotional and financial strain. So, make sure to take the right steps in your estate planning to avoid probate later.
Naming a 529 plan successor ensures that the account is directly passed on to the beneficiary and used as intended. If the account owner passes away without naming a successor and there is no specific instruction for how the 529 funds are to be used in the will, the account may be tied up in probate. Successors have similar authority over the account as the original owner. Hence, naming a successor ensures that the account is managed well, and the wealth is transferred to the right person when the time comes.
However, it is important to choose a successor carefully, as this person will be able to change beneficiaries and withdraw funds (subject to tax and penalty rules for non-qualified expenses).
To conclude
While the primary goal of a 529 plan is to fund education expenses, its benefits extend beyond that. A 529 plan can also play a role in estate planning and help you reduce taxes and transfer wealth efficiently. However, the tax treatment of these plans varies from state to state. This makes it essential to understand your state’s specific regulations. To know the current tax rules applicable in your state, you can check your state’s Department of Revenue or Treasury website or consider consulting a financial advisor for personalized guidance.
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