Practice Management

Reduce estate taxes with 529 plans

Key takeaways

  • While 529 plans have become increasingly popular as an education savings vehicle, not many people understand 529s as a tax-efficient planning solution for high-net-worth clients.
  • 529 plan gifts not only allow investors to gift money away from their estate but maintain control of those assets over time.
  • Introducing unique 529 strategies into your clients’ estate tax planning can differentiate your business and create more value for your clients.

With the start of each new school year, parents not only reflect on their children’s new academic milestones but also the harrowing costs associated with higher education.

Whether children are starting kindergarten, elementary school, or high school, one certainty that remains is that cost to attend college continues to rise. While all families want to set their kids up for education success, the importance of preparing and saving early is not always prioritized.

The 529 college savings plan is the unsung hero of financial planning. While you might think of 529 plans as small account investments, they can play a meaningful role in the growth of your business, and they can deliver value to your clients beyond education funding.

Having conversations with clients about planning for their children’s education builds trust and deepens your relationships. Of financial advisors selling 529s, they have seen increased retention and acquisition, helping to grow family assets over the long term.

Advisors weigh in on 529 planning in their business

The less recognized benefit of 529 plans is their ability to reduce estate taxes for your high-net-worth clients. Sharing this strategy creates client loyalty and differentiates your value proposition.

A 529 tax law primer

Before we dive into how 529s can be used as an estate tax planning tool, let’s recall the important basics of 529s, gifting and taxes.

The 2025 gifting rules allow an individual to contribute up to $19k per beneficiary per year or make a five-year accelerated gift of $95k at one time, without impacting the limit of their lifetime gifting levels. For married couples, those gifting limits double to $38k per year and $190k for the five-year forward gift.2 It’s important to emphasize that these gifting rules are per beneficiary, and there is no limit on the number beneficiaries an individual can open an account for. 

If an individual chooses to contribute more than the annual limit, the excess amount will be deducted from their lifetime gift exemption. While subject to change over time, the lifetime gift exemption limit is currently $13.99m for an individual and $27.98m for a married couple filing jointly. Contributions above the applicable exemption limit are subject to the gift tax, which can range from 18%-40%, depending on the amount of transfer.

The unique benefit of 529s

529 plan offerings have evolved over time in terms of the number of contributions allowed per account, with many plans now allowing contributions until the account is valued over $500k.3 Given higher maximum contribution caps and the lifetime gift exemption limit, contributing to multiple 529 accounts can be a beneficial estate planning strategy for families.

529 plans are unique in that they are the only type of account that allows the owner to gift money to a beneficiary — moving that money away from their estate— while still maintaining control over the account. That is, the owner controls who will be the beneficiary, who will be the successor account owner, how the investments will be allocated, and how the money will be ultimately used.

Estate Planning Example

Consider a wealthy couple who wants to minimize their estate tax burden and help their grandchildren prepare for higher education in the future. Let’s say they have 10 grandchildren and thus open 10 accounts. Using the five-year accelerated gift tax contribution, they can contribute up to $190,000 to each grandchild’s account, collectively removing $1.09m of assets away from their taxable estate. While staying within the gift tax exemption limits, the couple could continue to reduce their estate tax burden by contributing to their grandchildren’s 529 plan accounts every five years up to the account maximum.

Apply up to 5 years' worth of gifting in one single year

So, if the couple wanted to maximize their estate tax savings, they could contribute $5m among the 10 beneficiaries, fully funding their 529 plans and still have nearly $23m remaining on their lifetime gifting exemption. The couple maintains control over the 529 plan accounts while strategically adjusting their estate for the future.

Multi-Generational Family Planning

One long-term concept that has come into focus is the idea of using 529 plans as a multi-generational family education plan. The idea here is to continue to invest, grow and use these plans, taking advantage of their tax-exempt status, not just for the next generation of a family, but for the subsequent generations as well. Wealthy families can take advantage of the most valuable resource of all – time - to fund education for generations ahead.

Multi-Generational Family Planning Example

Consider a married couple who opens a 529 account for each of their two children, who are two years apart. They contribute $15,000 per year for each child, up to and through their college years. Assuming a moderate annual growth rate of 6%, the family would have nearly $900k in 529 assets by the time the first child starts college. Even with four-year private tuition projected to be near $500k in 18 years, this contribution strategy would still leave this family with a $300k balance after both children finish school.4 

The remaining assets can continue to grow in the account with no obligation from the plan to be withdrawn at any time. When ready, the couple can transfer ownership of these 529 plans to their adult children to provide a generous head start in saving for their own children’s education. While gift tax rules and guidelines will need to be considered in the account transition to their children, there is now an embedded asset base in place that can benefit from decades of potential monetary growth to cover education expenses for the next generation of the family.5

529 plan annual funding – Cumulative contributions and end-of-year values

529 plan annual funding

This strategy allows the family to grow their contributions tax-free, pay college expenses, and have money left over to consider for the next generation of their family.6 Moreover, it can provide strategic estate tax management with asset control for multiple generations while providing a foundation of security to ensure higher education for a family well into the future.

Conclusion

Introducing unique 529 strategies into your clients’ estate tax planning, as detailed above, differentiates your business and creates more value for your clients. Addressing both educational and estate needs for your clients demonstrates your focus on long-term strategic planning for your clients’ financial goals and the well-being of their family.

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Mark DiSipio, CIMA®
529 Sales Leader

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