By Attorney Kelly Jesson & Meg Abney
Most people are aware that 529 plans are a way to intelligently save for minor’s education with pre-tax dollars. We use the word “minor” because money can be set aside for any beneficiary, not just your child, to use on education. This article contains more details on these accounts so you can determine whether these plans are right for you.
What can 529 funds be spent on?
What can 529 funds not be spent on?
Can a 529 plan affect the ability to get financial aid/needs-based scholarships?
Yes. If the student or parent owns the 529 plan, on the FAFSA form, it counts as an asset. If a grandparent owns the 529 plan, it is not reported on the first year, but if money from the plan is used to pay for the student’s education, it must be reported as “untaxed income to the student” which may affect the ability to get aid in future years.
What happens if the beneficiary does not need the money?
When money is contributed to a 529 Plan, the account owner retains control of the money in the account, even when the beneficiary is no longer a minor. There is no expiration date on the account, and there is no age limit by which funds must be withdrawn. Withdrawals for non-authorized expenses are penalized and taxed, similar to early withdrawals from a retirement account. 529 plans cannot have multiple beneficiaries at the same time, but they can be split into two in the event you want to make distributions to more than one beneficiary.
If the account owner dies, who decides what happens to the account how the funds are to be spent?
It depends on the terms of the particular 529 plan. Sometimes the terms of a 529 plan will provide that the beneficiary becomes the new owner of the account upon the owner's death. However, this is not common practice.
Usually, the enrollment application for a 529 plan asks the owner to name a successor owner. This person becomes the new owner and even has the ability to change the account's beneficiary and make nonqualified withdrawals. For more control, it is better to name a trustee as the successor owner since the actions of the trustee are bound by the terms of the trust.
If no successor is listed, and the account holder dies, the former owner’s executor will become the new account holder. The executor will usually have the same powers over the account as the original owner.
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Kelly Rains Jesson