Guarding against Ownership Complications in a 529 Plan

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By: FEDweek Staff

If you are investing in Section 529 college savings plans for your children or possibly for grandchildren, you may accumulate large sums in such accounts. If so, these assets deserve careful estate planning.

Generally, title to a 529 account will be held by one person because joint ownership is not permitted. Most plans permit the account holder to designate a backup who’ll take over in case of death or incapacity.

Thus, you should name a replacement account holder. Some plans even allow you to designate a contingent backup to be named in case, for example, the account holder and the primary successor die in a common accident.

If no successor is listed, and the account holder dies, the former owner’s executor will become the new account holder. No matter who takes over, the new account holder usually will have the same powers over the account as the original owner.

He or she can shift funds among different 529 plans, change the beneficiary to another family member, and even take the money back, if needed. (Taking a refund will mean paying income tax and a 10 percent penalty on any earnings.) In some plans, a successor owner can divide the account among two or more beneficiaries.

Presumably, if an account holder becomes incapacitated and no successor has been named, control of the 529 accounts will pass to a guardian or the holder of a durable power of attorney. Therefore, if you invest in a 529 plan, your durable power of attorney should specifically permit gifts to your account.

Additional language may be necessarily to precisely spell out a power of attorney’s power over 529 plans. For example, suppose your son has three children and your daughter has one child.

Should your power of attorney include an equalization provision so your daughter’s side of the family gets the same as your son’s side? Alternatively, do you want each grandchild to receive the same amount for higher education?

Those questions should be answered within your power of attorney. Now, it’s important to decide which kind of 529 is right for you, and whether an alternative education savings strategy might be a better fit for your situation.

Two main types of 529 plans:

College Savings Plans – These function like investment accounts, allowing funds to grow tax-free. The account owner controls investment options and withdrawals.

Prepaid Tuition Plans – These allow prepayment of tuition at today’s rates for future use at participating colleges, reducing the impact of tuition inflation.
Alternatives to 529 Plans

Other options:

Coverdell Education Savings Accounts (ESAs) – Offer tax-free withdrawals for both K-12 and college expenses but have lower contribution limits ($2,000 per year per beneficiary) and income restrictions.

Custodial Accounts (UGMA/UTMA) – Allow assets to be held in a minor’s name, offering flexibility beyond education expenses but with less tax efficiency.

Roth IRAs – Though primarily for retirement, Roth IRAs allow penalty-free withdrawals of contributions for education expenses, offering tax advantages without requiring education-specific use.

U.S. Savings Bonds – Certain bonds (Series EE or I) can be cashed tax-free for education if income requirements are met.

Scholarships and Grants – Maximizing financial aid through merit- or need-based scholarships can reduce reliance on savings.

Finally, don’t overlook a regular old brokerage account – taxable – that you set up and manage yourself. The benefit here would be simplicity and flexibility.