Q&A: Can I Leave Money to a 529 in My Estate?

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There is no right or wrong decision in estate planning. There are only your wishes.  Before we die, we have the opportunity to leave any of our possessions to anyone we choose. It is your right to pass on your wealth to whomever or whatever you choose.

When I write about estate planning or work with clients on their own plans, it is my mission to encourage clients and readers to dream bigger until they are truly satisfied with their plan. One common poor outcome in estate plans is settling for a cookie-cutter estate plan when you needed a custom design.

Recently, we were asked the question:

I really want to make sure my grandchildren’s education is paid for. I’m making annual gifts under the gift limit each year to their 529 plans, but can I leave money directly to those 529 plans in my estate plan?

What a lovely intention. The short answer is yes, but there are some things to consider before you amend your estate plan.

First, an estate or trust cannot be the account owner for a 529 plan. When you die, your successor account owner will have control over the funds. This is important because the way 529 plans work now let’s the account holder change the beneficiary or account holder at will to other family members or even themselves. Furthermore, they can withdraw funds, for a tax penalty, for themselves for any reason.

While you may intend to leave the assets specifically for education expenses, with a 529 plan as the account type, there is no guarantee that those funds will be used for education nor is there a guarantee even that the current beneficiary will be the one to benefit from the assets.

Second, the account owner receives the VA state tax deduction regardless of who contributes. This means that if the successor owner of the 529 lives in Virginia, he or she will likely receive the tax benefit from your estate’s donations.

Third, your intended beneficiaries may no longer be pursuing education by the time you die, a 529 plan may no longer be the best account type for college savings, or the 529 plan may interfere with grants or scholarships he or she is already pursuing.

For these reasons, the best way to implement this intention is likely to give your executor the option of delivering your gift to a 529 plan.

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.