The average person considers 529 accounts to be tools that facilitate saving money for college.  Indeed, these flexible accounts empower individuals to transfer assets to others as well as oneself for the purpose of advancing a beneficiary’s education.  However, 529 accounts are also quite helpful in the context of estate planning.

The Role of 529 Accounts in Today’s Estate Planning

Some people are simply unable to put money aside for their child, tween or teen’s college education without putting their own personal financial goals in jeopardy.  However, if you have enough money to save for your offspring’s college education, you should consider the merits of 529s, also known as specialized savings accounts. 

These unique accounts provide advantages for beneficiaries as well as donors as they have comparably high contribution ceilings.  The nuanced tax rules pertaining to such accounts empower individuals to reduce a taxable estate, ultimately lowering both estate taxes and federal gift taxes down the line.  The lifetime exclusion per individual is around $11.5 million yet this threshold will move back to around $5 million per individual within four years.

The rules pertaining to 529 accounts permit making a one-time contribution to the account that is upwards of five times the yearly $15,000 limit.  Once the five years pass, another lump sum gift can be made.  Your investments will have time to increase in value during this window of time.  In the end, the gift provided to the beneficiary won’t have a gift tax as long as all of the rules are adhered to. 

Furthermore, this approach reduces the size of the taxable estate by the gift amount, decreasing estate tax liability all the more in the years ahead. This is possible as contributions made to 529 accounts are viewed as a completed gift from donors to beneficiaries.

Retain Control When Using 529 Accounts

There is widespread belief that gifting considerable sums of money to a 529 account relinquishes control over the money.  In reality, these unique accounts still provide considerable control, particularly if the account is titled in the donor’s name.  If this is the case, the donor can receive his or her money back at any point desired.  This means the money is once again a component of the taxable estate in which the nominal federal tax rate is applicable. 

There is also the potential the selected beneficiary of the 529 account will not require all of the money in the account as a result of larger than expected financial aid or scholarships.  If this is the case, the money in the 529 account can be earmarked for other forms of education such as grad school.  It is also possible to alter the beneficiary to a family member as many times as desired as the majority of 529 accounts are not hampered by time limits.

Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan.  Such benefits include financial aid, scholarship funds, and protection from creditors. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.


While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.