529 Plans are state-administered, tax-advantaged savings vehicles used for education. They can also be utilized for estate planning to pass assets to descendants, support the value of education among multiple generations, and lower taxes each year and upon death.
Contributions to 529 Plans are made with after-tax dollars. Funds can be invested, and annual dividends, interest, and capital gains are not taxed. Distributions for qualified education expenses are tax-free.
- Qualified expenses: university tuition & fees, books & supplies, housing & meal plans, computers & equipment for school, and up to $10k/year tuition for elementary/secondary school.
- Unqualified expenses: health insurance, travel, and sports-activity fees.
There are 6,000+ colleges (400+ abroad) that qualify for 529 Plans (e.g., University of Melbourne, Cambridge, and Oxford).
Each 529 Plan has one beneficiary (e.g., a child). Contributions are considered gifts and removed from your taxable estate. This is especially appealing for those who will likely have an estate tax issue. The current estate tax exemption is ~$12MM/person, but in 2026 this reverts to ~$6MM/person. Considering federal estate tax is as high as 40%, it can amount to a large sum.
With proper planning, estate tax can be mitigated, and hard-earned assets can be utilized in a way that reflects values and goals.
In 2022, a U.S. person can gift $16k/beneficiary annually without it affecting their lifetime gift tax exemption.
Example 1: James and Angelina are U.S. taxpayers who have three children. They can contribute $32k/year to each child’s 529 Plan (total: $96k/year) with no gift tax implications. Over 10-years, they can remove $960k from their taxable estate, excluding investment growth!
You can also Superfund (i.e., make 5-years of contributions upfront), allowing a large 1x removal from your estate.
Example 2: Rob and Christine are Americans abroad who have two children. Rob’s $750k of Google RSUs just vested. They can contribute $160k to each child’s 529 Plan this year (total: $320k) with no effect on lifetime gift tax exemption.
There is an optionality for “overfunded” accounts. Namely:
- Use the balance for a child’s graduate school
- Change the beneficiary to another child and use it for his/her education
- Let it grow tax-free and change the beneficiary to future grandchild
- Withdraw funds for personal use (con: pay tax on earnings + 10% penalty)
529 Plans are a tool that can support your family’s education over generations and lower estate tax liability.
As Howard Ruff said, “It wasn’t raining when Noah built the ark.” Planning is essential for financial success.
For more information on 529 Plans and how they can support your wealth journey, please reach out to Avrio Wealth.