A 529 plan can be an effective component of an estate plan

A 529 plan can be an effective component of an estate plan

May 14, 2025 | Bill Cass CFP®, CPWA®

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 will not 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. 

 

Red. 4337765

 

More in: College Savings, Taxes

Any Putnam funds referenced in the above articles are not available for sale outside the United States.

Services provided by Putnam may not be available in all countries or to all investors. This content is not an offer to any investor who is not qualified under local law.

The views and opinions expressed are those of the fund manager above, are subject to change with market conditions, and are not meant as investment advice.

This material is for informational and educational purposes only. It is not a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. It is not intended to address the needs, circumstances, and objectives of any specific investor. Putnam, which earns fees when clients select its products and services, is not offering impartial advice in a fiduciary capacity in providing this sales and marketing material. This information is not meant as tax or legal advice. Investors should consult a professional advisor before making investment and financial decisions and for more information on tax rules and other laws, which are complex and subject to change.

All funds and investment products involve risk, and you can lose money. See the prospectus for details. Any economic and performance information is historical and not indicative of future results.

If you are a U.S. retail investor: Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, contact your financial representative, call Putnam at 1-888-4-PUTNAM (1-888-478-8626), or click on the prospectus section to view or download a prospectus. Please read the prospectus carefully before investing.

Putnam Retail Management, LP and Putnam Investments are Franklin Templeton companies.

In the United States, mutual funds are distributed by Putnam Retail Management.