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