A 529 Plan Can be an Effective Component of an Estate Plan

The beauty of 529 plans is that they can provide many benefits outside of merely funding college education. For those at higher wealth levels and depending on circumstances, a 529 plan should be considered as part of a broader estate plan. The opportunity to remove assets from an estate while maintaining a level of control over those assets is fairly unique within the tax code. This may be appropriate for grandparents who are reaching a time where they are interested in reducing the size of their estate. By remaining as an owner of the 529 for the benefit of a grandchild, they can still retain some control over the account.

A 529 plan also has a unique provision which allows a contribution representing five years’ worth of gifts all at once, up front. As part of an estate planning strategy, this single gift can transfer significant assets out of an estate, especially if there are multiple grandchildren receiving the funds. This can be an effective estate-freezing technique, meaning that appreciation of those 529 funds post-contribution occurs outside of the grandparent’s estate.

Consider this example of two grandparents front-loading gifts to five grandchildren.
With an annual gift tax exemption of $19,000 for individuals for 2025, each grandparent would be able to donate $95,000.
If both grandparents donate, that makes the total $190,000 per grandchild.
Front-loading the gift to five grandchildren would total $950,000 that can be taken out of their estate.
If that $950,000 in assets were subject to federal estate tax at today’s maximum rate that would be a tax bill of almost $400,000 (assuming a 40% federal estate tax rate)

It is important to note that if the grandparent passes away during the five-year period following the front-loaded gift, then a pro-rata portion of those assets will revert back to the deceased grandparent’s estate. See our article, “Reasons why a grandparent-owned 529 may make sense.”

Control over assets

A grandparent can choose to fund and remain the owner of a 529 plan to benefit a grandchild. If they do, they retain control over the account. That means if they need access to the funds for some reason, they can make a non-qualified distribution. This may provide some peace of mind for grandparents who are concerned about making gifts and losing control over those assets. If the grandparent took a non-qualified distribution any earnings would be subject to income taxes and a 10% penalty.

A grandparent-owned 529 won’t diminish federal aid

When completing the Free Application for Federal Student Aid (FAFSA), a 529 owned by a grandparent is not considered as an asset for purposes of calculating financial aid.

20% of student assets are considered as part of the calculation and up to 5.6% of certain parent assets are taken into account.
Currently, savings in 529 plans owned by grandparents (and other non-parents) are not reported as assets when completing the FAFSA.
Certain colleges require that the CSS-Profile be completed when applying for financial aid. Depending on the institution, different rules may apply with respect to reporting assets, including 529 accounts owned by grandparents for example, as part of the filing. See cssprofile.collegeboard.org/ for more information.

Additionally, due to recent changes in the federal financial aid application, distributions from grandparent-owned 529 accounts are not considered as income to the student as part of the FAFSA income test for determining aid. Prior to this change, distributions from a grandparent-owned 529 could significantly reduce eligibility of aid on a subsequent FAFSA application.

Helping grandchildren jump-start retirement savings

A provision from SECURE 2.0 allows the transfer of 529 funds to a Roth IRA if certain conditions are met.

Consider a grandparent who funds a 529 shortly after the birth of a grandchild.
When at least 15 years have passed and the grandchild has some earned income from a summer job, funds could be transferred from the 529 plan to a Roth IRA in the name of the grandchild. This can help them get a start on saving for retirement.
Note that some states may not conform to federal law for state income tax purposes for recognizing this provision allowing 529 funds to be transferred to a Roth IRA. Consult with a tax professional for more information.

Seek advice

As with any shifts in estate planning, it is important to consult with a financial professional who is familiar with your individual financial situation. There may be factors which grandparents should consider before choosing to be the owner of a 529 for grandchildren. For example, when pursuing Medicaid eligibility, assets held in 529 plans would generally be considered. For grandparents who want to preserve their annual gift for other assets, making direct tuition payments to the institution may be a better option. These direct payments are not considered a completed gift for federal gift tax purposes.

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For more information, speak with your financial professional.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Investors should carefully consider the 529 plan’s investment goals, risks, charges and expenses before investing. To obtain the Program Description, which contains this and other information, talk to your financial professional or call Franklin Distributors, LLC, the manager and underwriter for the 529 plan at (800) DIAL BEN/342-5236 or visit franklintempleton.com. You should read the Program Description carefully before investing and consider whether your, or the beneficiary’s, home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in its qualified tuition program. 

Franklin Templeton’s 529 College Savings Plan is offered and administered by the New Jersey Higher Education Student Assistance Authority (HESAA); managed and distributed by Franklin Distributors, LLC, an affiliate of Franklin Resources, Inc., which operates as Franklin Templeton.

Investments in Franklin Templeton’s 529 College Savings Plan are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed by the State of New Jersey, Franklin Templeton, or its affiliates and are subject to risks, including loss of principal amount invested. Investing in the plan does not guarantee admission to any particular primary, secondary school or college, or sufficient funds for primary, secondary school or college.

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