March 14, 2025

How 529 Plans Can Be a Powerful Estate Planning Tool

For high-net-worth individuals focused on wealth preservation, a 529 plan can be a valuable tool. While primarily known for funding education, a 529 plan can also help investors work to transfer wealth efficiently, to reduce potential estate taxes and preserve assets for the future generation.

If you're planning your estate and want to explore tax-efficient wealth transfer strategies, here’s why you should consider incorporating a 529 plan into your financial plan.

What is a 529 Plan

A 529 plan is a tax-advantaged savings account designed to help individuals and families save for education expenses. While originally intended for college savings, 529 plans have expanded to cover K-12 tuition, apprenticeships, and even student loan repayments. Contributions to your 529 plan grow tax-free and allow for tax-free withdrawals when used for qualified education expenses. These education expenses can expand to tuition, books, and room and board at eligible institutions.

Role in Estate Planning

While 529 plans are widely known for their role in education savings, their lesser-known benefit is their value as an estate planning tool. High-net-worth individuals can use 529 plans to transfer wealth, helping reduce their taxable estate while retaining control over the assets. Additionally, 529 plans allow for multigenerational planning, meaning unused funds can be passed down to future beneficiaries, helping to fund education for children, grandchildren, and beyond.

With their tax-advantages, flexibility in beneficiary changes, and Roth IRA rollover option, 529 plans are an attractive part of a legacy strategy for families looking to maximize their financial impact.

Tax-Free Growth & Withdrawals for Education

Compared to other wealth transfer vehicles that may carry tax implications, or taxable brokerage accounts, which generate annual tax liabilities, 529 plans offer a way to transfer wealth while potentially reducing estate taxes. Unlike taxable investment accounts, where earnings are subject to capital gains tax, 529 plan funds can grow tax-free when the funds are used to make qualified purchases. These qualified purchases include many education expenses that can span to tuition & fees, room & board, books & supplies, etc. Please note that while a 529 plan can apply to many education expenses, it does not apply to all. Verify with your plan provider to ensure what you use the funds for is qualified.

With this tax advantage, the plan can help individuals fund education expenses efficiently, optimizing the long-term value of contributions.

Large Contributions Without Immediate Tax Consequences

Another estate planning benefit a 529 plan offers is the ability to make large contributions without immediate tax consequences. In 2025, the IRS allows individuals to gift up to $19,000 per beneficiary per year (as of 2024) (if you are married, this becomes $38,000). These contributions do not count toward your lifetime gift tax exemption.

However, with a 529 plan, individuals can utilize a "superfunding" strategy, where they can contribute up to $90,000 ($180,000 for couples) as a one-lump sum in a single year and elect to treat it as if it were spread over five years for tax purposes. Individuals will not suffer tax consequences as long as they do not make any more contributions in the next five years.

This can allow high-net-worth individuals to remove a significant sum from their taxable estate while maintaining full control over the funds.

Control Over Assets Remains with the Account Owner

In using a 529 plan, the account owner can retain full control over the assets. With a 529 plan, the donor decides when and how the funds are used, checking that they serve their intended purpose. The donor decides investments and withdrawals made. The beneficiary only has control over the account if they are also the account owner.

Unused funds within the fund can be transferred to another beneficiary. If circumstances change and the owner needs access to the funds, they can withdraw the money, though earnings on non-qualified withdrawals will be subject to income tax and a 10% penalty.

SECURE 2.0 & the 529-to-Roth IRA Rollover

A new provision in the SECURE 2.0 Act in 2024 created the ability for investors to roll over unused 529 funds into a Roth IRA for the beneficiary. Under this new rule, up to $35,000 in leftover 529 funds can be transferred into the account beneficiary's Roth IRA, providing a tax-efficient way to convert excess education savings into long-term retirement funds.

There are a few key requirements to take advantage of this option. For one, the 529 account must have been open for at least 15 years. The rollovers are also still subject to annual Roth IRA contribution limits.

This new option helps to not waste unused education savings and works to further secure the beneficiary’s financial future, making 529 plans an even more attractive estate planning strategy.

Important Details: Using 529 Plans Alongside Trusts

It is important to note that while 529 plans are a powerful estate planning tool, they are not a substitute for trusts. Instead, they can serve as a valuable complement to a broader wealth transfer strategy. Unlike irrevocable trusts or dynasty trusts, which are designed to manage and distribute wealth over generations, 529 plans are specifically geared toward education funding with tax-free growth and withdrawals for qualified expenses. Trusts, on the other hand, provide greater flexibility for non-education-related asset transfers and can help shield wealth from creditors or certain tax implications.

For estate planning efficiency, high-net-worth individuals may choose to fund 529 plans for education costs while using trusts for other wealth preservation goals, such as property transfers or business succession. Combining both strategies allows for tax-efficient gifting, greater control over asset distribution, and long-term financial security for future generations. If education is a major part of your family’s legacy, using 529 plans alongside trusts can help balance tax benefits with broader estate planning objectives.

Final Thoughts

For high-net-worth individuals and families, 529 plans offer a unique and tax-efficient way to transfer wealth while providing future generations with access to education. By incorporating strategies like "superfunding" and the new 529-to-Roth IRA rollover, these accounts can help reduce potential estate taxes while working to secure educational and financial opportunities for years to come.

However, 529 plans should be thoughtfully integrated into a broader estate plan that may also include trusts, gifting strategies, and other financial tools. To structure your plan effectively, it might be best to consult with a wealth advisor or estate planning attorney.

With the right strategy, 529 plans can become a cornerstone of your legacy, working to support education and financial stability for generations to come.

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