Sending my first and only child off to college this fall has given me a new appreciation for the value of Section 529 Plan accounts. Many of our clients set up these accounts for their children or grandchildren when they are young, with the intention that the account will be there to be used when it’s time to pay for college. I will take this opportunity to say thank you, on behalf of all of the beneficiaries of 529 Plans out there, to those of you who have had the foresight to set up these accounts. When paying for college, every little bit of assistance helps!
It is important to understand that 529 Plan accounts are not treated the same for all purposes. In addition, the identity of the owner of the account can affect how the account is treated. From an estate and gift tax perspective, the law views the amount contributed to a 529 Plan account as a gift to the beneficiary of the account (the child or grandchild). If the owner of the account passes away, the balance of the account is not added to the owner’s other assets when determining if an estate tax must be paid or when calculating the estate tax due. That being said, the owner of a 529 Plan account retains certain rights, such as the right to change the beneficiary of the account, and to withdraw the contributed funds from the account (although if withdrawals are made for reasons other than to pay for education expenses income tax plus a penalty will be due on the withdrawn amount).
From a long-term care planning perspective, the funds in a 529 Plan account will be considered “countable” assets in determining the owner’s eligibility for Medicaid benefits (the public benefits that pay for long-term nursing home care). Depending upon the owner’s situation and the value of other assets, the 529 Plan assets may have to be spent on the owner’s care before the owner will be eligible to receive Medicaid benefits. For this reason, if the owner’s goal is to ensure the funds in the 529 Plan account are available for education, and the owner is willing to give up control of the account and access to the funds in the future, it may be advisable to transfer ownership of the account to the parent of the beneficiary/child or grandchild. This should not be done hastily as the transfer of the ownership of the account will be a disqualifying transfer for Medicaid eligibility purpose. In addition, careful consideration should be given to whether the prospective new owner is financially responsible, and, if relevant, the impact on financial aid if the account is owned by the student’s parent vs. grandparent.
Finally, keep in mind that the owner of a 529 Plan account has the ability to designate a successor owner. This is something that should be done in all cases. Without a successor owner named, the account will be subject to probate at the account owner’s death, which involves cost and delay in access to the funds for a period of time. Probate can be easily avoided by designating a successor owner.