Know Your Estate Planning Options: 529 Plans
The Internal Revenue Service (IRS) explains that a 529 plan is a “plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training.” If you have funds within a 529 plan, there are important estate planning considerations. Here, our Boston estate planning attorney provides an overview of the key things to know about your options for a 529 plan in Massachusetts.
What is a 529 Plan?
Simply described, a 529 plan is a tax-advantaged savings vehicle that is designed to help families set aside money for future education expenses. It is named after Section 529 of the Internal Revenue Code (IRC). The plan allows for earnings to grow tax-deferred. Further, qualified withdrawals are tax-free when used for approved education costs, such as tuition, room and board, fees, and books.
Note: Massachusetts offers its own version of the 529 plan that is called the U.Fund College Investing Plan. It is managed by Fidelity and there are the potential state tax deductions for residents who contribute.
Who Owns the Plan, and Why It Matters in Estate Planning
With a 529 plan, the account owner (not the beneficiary) always retains full control of the funds. That is a distinction that is key when considering the estate planning benefits. The account owner can change the beneficiary, control the distributions, and even revoke the plan outright. For residents of Massachusetts, the control allows for flexibility while also enabling the use of 529 plans as an estate planning tool. There are a number of potential advances. For example, contributions to a 529 plan are considered completed gifts for federal gift tax purposes even though control of the funds are retained by the owner. A single person may contribute up to $19,000 annually per beneficiary in 2025 without triggering the gift tax.
Handling Leftover Funds, Changing Beneficiaries, and Avoiding Mistakes
529 plans are generally designed to pay for a child’s college education. In some cases, the original beneficiary of a 529 plan does not use all of the funds. That could be for many different reasons, such as scholarships, a change in their personal education plans, or other life events. The good news is that 529 plans allow the account owner to change the beneficiary to another qualified family member without penalty. That makes the account a flexible tool for multi-generational planning. It can be great for estate planning. For example, leftover funds from one child can be reassigned to a sibling or even a grandchild.
To be clear, if funds are ultimately withdrawn for non-qualified expenses, the earnings portion is subject to income tax and a 10 percent penalty. However, strategic planning can generally avoid penalties. For example, rolling unused funds into a Roth IRA for the beneficiary starting can preserve tax benefits. Up to $35,000 of unused 529 plan funds may be rolled over into a Roth IRA without penalty in Massachusetts in 2025.
Contact Our Boston Estate Planning Attorney Today
At Fisher Law LLC, our Massachusetts estate planning lawyer has the knowledge, skills, and legal experience that you can count on. If you have any questions about 529 plans and estate planning, we are here to help. Contact us now for a fully private initial consultation. Our firm provides estate planning representation throughout the Greater Boston metropolitan area.
Source:
irs.gov/newsroom/529-plans-questions-and-answers
