When planning for your family’s future, you may have heard of 529 plans—tax-advantaged savings accounts designed to help pay for education expenses. But did you know that a trust can own a 529 plan, creating potential tax benefits and added control over how the funds are used? Let’s break down what this means and why it might be a smart estate planning move.

 

What Is a 529 Plan?

A 529 plan is an investment account specifically designed to cover qualified education expenses, including tuition, books, supplies, and even room and board. One of its biggest perks? The earnings grow tax-free, and withdrawals are tax-free as long as they are used for qualified expenses.

 

However, many people assume that only individuals can own 529 plans—but that’s not true. Trusts (or rather, the trustee of a Trust) can also own them, and this can be a powerful estate planning tool.

 

How Does Trust Ownership Work?

• When a trust owns a 529 plan, the trustee becomes the “account owner.” The trustee is responsible for:
• Choosing or changing the plan’s designated beneficiary (the person whose education expenses the plan will cover).
• Managing distributions from the plan.
• Ensuring that the funds are used for qualified education expenses.

 

 

What Are the Benefits of a Trust-Owned 529 Plan?

There are several benefits to having a 529 plan owned by a trust, including:

1. Control Over Distributions: With a trust, the trustee maintains control over how and when the 529 funds are used. The trustee can make decisions to ensure the money benefits the right people and is spent appropriately.
2. Tax Advantages: A trust-owned 529 plan can pass down unused funds to future generations without triggering gift, estate, or generation-skipping transfer taxes. This means your family can continue to benefit from the funds over time.
3. Flexibility in Beneficiary Designation: If the original beneficiary doesn’t use all the funds, the trustee can change the beneficiary to another family member, such as a sibling or cousin. The SECURE Act 2.0 also allows account owners of 529 plans to roll over excess funds into a Roth individual retirement account for the benefit of the designated beneficiary without incurring income tax on that rollover, up to a maximum of $35,000.
4. Avoiding Crummey Powers: A common concern with gifting through trusts is the need for Crummey powers (which require notifying beneficiaries of the gift to qualify for tax exclusions). With a trust-owned 529 plan, Crummey powers aren’t necessary.

 

What Should You Watch Out For?

While the benefits are substantial, there are a few key considerations:

 

 

Qualified Expenses Only: If funds are used for non-qualified expenses, the earnings portion will be subject to income tax as ordinary income and a 10% penalty.

 

 

Contribution Limits: Each state sets a maximum contribution limit for 529 plans. Trustees need to monitor these limits to ensure compliance.

 

 

State Tax Implications: Some states provide tax deductions for contributions to in-state 529 plans. Trustees should carefully consider which state’s plan to select, factoring in both investment options and tax benefits.

 

 

What Should Be Included in the Trust Agreement?

For a trust to properly manage a 529 plan, the trust agreement should give the trustee specific powers, such as:

 

 

The authority to invest in and hold a 529 plan.

 

 

The ability to change the designated beneficiary as needed.

 

 

The power to roll over excess funds into future plans or other investment vehicles, such as a Roth IRA, when allowed by law.

 

 

Is a Trust-Owned 529 Plan Right for Your Family?

A trust-owned 529 plan is ideal for families who want to balance tax-efficient saving with control and long-term planning. If you have concerns about ensuring that the funds are managed properly for future generations or avoiding the hassle of Crummey powers, this option could be a perfect fit.

 

Next Steps

If you’re considering a trust-owned 529 plan, consult an experienced estate planning attorney who can help you set up the trust correctly and tailor it to your family’s needs. With proper planning, you can ensure your family benefits from the long-term advantages of this powerful estate planning tool.

 

Final Thoughts Education is one of the greatest gifts you can give your loved ones, and a trust-owned 529 plan allows you to provide that gift in a way that maximizes control and minimizes taxes. With the right structure in place, you can leave a legacy of learning that spans generations.