College Savings Plans and Estate Planning

We have recently written about various estate planning mechanisms that can enable you to pay for a young person’s college tuition. If you are interested in making those types of arrangements, it is important to understand how they might affect your estate plan. A college savings plan could become an important part of your comprehensive estate planning strategy.

The Basics

College savings plans, or 529 plans, come in a variety of shapes. There are many characteristics that you need to consider when determining the plan that is right for you. One of the most popular 529 plans is the prepaid tuition plan. With this type of plan, you make cash contributions to an account that invests that money and gains interest over the life of the account. The earnings the account makes are tax-free so long as they are used for qualifying expenses related to higher education.

Contributions to these accounts are not deductible for federal income tax purposes, but depending on the plan you select and the state where you file income taxes they could provide some state-level relief. There may even be some state-level tax incentives that are offered for establishing and maintaining these types of plans. You can change the beneficiary of these accounts and you can also get your money back should you decide to close the account.

With the ever-increasing cost of higher education and related expenses, there may still be a need for additional financing when it comes to the cost of college that simply cannot be covered by a 529 plan. It is important to remember that 529 plans are considered the assets of the individual contributing to them, which means that students may still be eligible for financial aid or need-based scholarships if certain conditions have been met.


If you are considering a 529 plan, there are some important restrictions. Your annual contributions to the program cannot exceed the annual gift tax exemption limit which is currently set at $15,000. You can only fund these plans with cash, so you cannot contribute stocks or other types of investments to the plan. There are also potential tax consequences for earnings on non-qualifying withdrawals that beneficiaries of such plans need to be aware of.

With a 529 plan, it is also possible to combine five years’ worth of contributions into one annual contribution without running afoul of federal gift taxes. However, you will not be able to contribute to the account again until the sixth year. This is often an option for individuals that may not have planned far enough ahead for a 529 plan to make the impact on tuition they had hoped it would.

529 plans could be an effective part of your estate plan and securing the academic future of your beneficiaries. Working with an experienced estate planning attorney can help you understand just how a 529 program fits into your comprehensive estate planning strategy.

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