Finance Advisor's Strategies for Harnessing the Potential of a 529 Savings Plan
High-net-worth families have discovered that 529 plans offer more than just tax savings and investment benefits. These education savings vehicles are powerful estate planning tools, offering enhanced gifting strategies, financial aid advantages, expanded usage options, and broad contribution flexibility.
One of the key benefits of 529 plans is estate planning. Contributions to a 529 plan are considered completed gifts, which removes those assets from the taxable estate. This is particularly advantageous for high-net-worth individuals and grandparents aiming to reduce estate size while benefiting future generations through education funding.
Another benefit is the ability to front-load contributions. Many states allow front-loading of 529 contributions, permitting up to five years’ worth of gift tax exclusions to be applied at once. This accelerates tax benefits, maximizes the tax-free growth period, and enables more substantial early funding for the beneficiary’s education.
In terms of financial aid, 529 accounts are treated more favorably in the financial aid assessment compared to other assets like taxable brokerage accounts. For example, if a grandparent owns the 529 plan, it often doesn’t count on the FAFSA form, potentially improving the student’s eligibility for need-based aid.
Besides college tuition, 529 plans can now be used for K-12 tuition (up to $10,000/year per student), homeschooling expenses, and even rolling unused funds into a Roth IRA for the beneficiary. This enhances the plan’s flexibility in covering various education-related costs and managing overfunding.
The portability of 529 plans across states and schools allows families to choose schools nationwide and still benefit from the plan’s advantages, although state tax benefits may vary. Additionally, unlike some education savings accounts, 529 plans allow friends and extended family to contribute, which is useful for growing the beneficiary’s education fund through gifts and celebrations without affecting the contributor’s own limits.
However, it's important to note that withdrawals from a taxable brokerage account could trigger capital gains taxes. Also, it is advisable to avoid overfunding a 529 plan and prioritize retirement savings first. In states that offer a tax deduction for 529 contributions, front-loading five years' worth of gifts can provide a meaningful tax benefit.
A blended approach, funding 50% to 75% of the expected education cost into a 529, with the remaining balance placed in a taxable brokerage account, can offer flexibility. 529 plans remain the gold standard for education savings, particularly for high-net-worth families.
Annually contributing to multiple 529 plans for each grandchild can be part of a broader multigenerational giving strategy. Grandparents can pay a school directly without triggering gift tax limits through direct tuition payments. UGMA/UTMA custodial accounts can be used for continuing family gifting beyond 529 limits, but they transfer control to the beneficiary at age 18 or 21.
For families with complex legacy goals or special needs, education trusts can provide added control, oversight, and structure. Some states offer added perks, such as Pennsylvania's SAGE Scholars program, which provides tuition discounts at participating schools.
In conclusion, for high-net-worth families, 529 plans provide powerful estate planning tools, enhanced gifting strategies, financial aid advantages, expanded usage options, and broad contribution flexibility beyond the core tax savings and investment benefits usually emphasized. These features make 529 plans a strategic vehicle for intergenerational wealth transfer with education funding goals.
When considering a 529 plan, it's essential to ask smart questions about plan costs, tax implications, financial aid considerations, and backup strategies for unused funds. It's also crucial to remember that education savings should not come at the expense of retirement savings.
Individuals aiming to reduce their estate while benefiting future generations through education funding may find 529 plans particularly advantageous, as contributions are considered completed gifts, thereby removing those assets from the taxable estate (estate planning). Additionally, these education savings vehicles offer enhanced gifting strategies, such as the ability to front-load contributions, which accelerates tax benefits and enables more substantial early funding for the beneficiary’s education (education-and-self-development).
