How a 529 Plan Can Benefit You: Estate Planning and Wealth Transfer

A 529 plan may offer multiple benefits as part of an estate planning and wealth transfer strategy. It is a tax-advantaged savings plan that encourages saving for future education costs. These plans enable parents to save for their children's college expenses. However, their role in estate planning and wealth transfer has become more accepted due to their characteristics, tax advantages, and potential for flexibility in distribution.

Estate planning benefits

Reduces the size of taxable estate

One of the primary benefits of a 529 plan is its potential to reduce the size of one's taxable estate while retaining control over the funds. Contributions you make to a 529 plan are considered gifts for tax purposes.

In 2025 individuals can contribute up to $19,000 per beneficiary without triggering a gift tax. Under a special election, individuals can 'super-fund' their contributions upfront to $95,000 per beneficiary (or $180,000 for married couples), constituting five years' worth of gifts and removing them from one's lifetime taxable estate.

Tax-free withdrawals

The tax implications of a 529 plan are most beneficial. Investment growth in 529 plans is tax-free when withdrawing funds from federal and state taxes in most states to pay for qualified expenses:

• Tuition and fees
• Books
• Equipment used in courses to obtain a degree
• Room and board when enrolled at least half-time
• Computers

This feature makes it an appropriate tool for education savings and a strategic instrument for wealth transfer and estate planning.

Account owner control

What sets the 529 plan apart is that the account owner retains control over the assets. Unlike other gifting techniques, where the giver loses control over the gifted assets, with a 529 plan, the owner can change beneficiaries or reclaim the funds (with penalties and income taxes applied). This control can be instrumental, especially when unforeseen circumstances arise.

Ability to change beneficiaries

The ability to choose and change beneficiaries adds to the flexibility of a 529 plan. If one child decides not to attend college, the owner can change the beneficiary to another family member. This flexibility provides options for transferring wealth, offering the control needed over one's financial legacy.

A 529 plan to fund education expenses may be an effective vehicle for estate planning and wealth transfer. It caters to various planning needs by offering tax benefits, flexibility in changing beneficiaries, and the ability to retain control over assets.

It's vital to consider the child's education savings needs, estate planning goals, and potential changes in tax laws. It's essential to consult with financial and tax professionals to determine whether this strategy aligns with the overall goals of wealth transfer as part of an estate plan.