What would happen to your child or grandchild’s college savings if you passed away? The answer to that question depends on how the College 529 Savings Plan you contribute to is planned. It is a very important investment you are making that affects your family’s future, so you should consider it part of planning your estate. Here are five reasons why a College 529 Savings Plan is just like estate planning:
1. It’s an investment
A College 529 Savings Plan is a tax-advantaged investment vehicle. It is important to treat it as such. Like other investments, a 529 Savings Plan investment outlives the investor. Because the whole point of a college savings plan is to contribute to someone’s higher education, what happens when the plan outlives a contributor is key. Poor planning or no planning at all can lead to an outcome that you did not have in mind for your investment.
2. It’s for more than education
A 529 savings plan does not necessarily have to be spent on education. While the tax advantage of using the plan is specifically only for educational expenses, the plan can be spent on other things. When used for non-qualified educational expenses, income tax must be paid on the plan, and there is a financial penalty incurred. The exemptions from paying the income tax and the penalty when using the plan for non-educational expenses generally make sense — if the designated beneficiary dies or becomes disabled, the plan is exempt. If the designated beneficiary has his or her education paid for by a qualified scholarship, veterans’ assistance, or their employer, the plan is exempt. This makes choosing the right successor to oversee the plan vitally important.
3. A successor is required
Someone has to be the successor to the plan’s management if you pass away. If no one is named a successor or the documents naming one are incomplete, the plan’s management can get tied up in probate court. Having a secondary successor is also important, just in case. The successor takes complete control over the management of the plan as if they were the one who set the plan up and contributed to it. The successor can also change who the beneficiary of the plan is. Make sure any 529 savings plans you contribute has both a primary and secondary successor you trust.
4. Anyone can be the successor
If the owner of the 529 savings plan passes away, and the beneficiary is younger than 18, the court decides who the successor is. If the beneficiary is 18 or older, he or she gains full control over the account. Without proper planning, someone with no connection to the family may end up managing the 529 savings plan until the child turns 18. Make sure you choose successors you trust, and don’t let the court end up deciding who is in charge of the account because of lack of planning.
5. It’s your money, make sure you decide what happens with it
College 529 Savings Plans are state-administered. As such, each state has different rules. It is important to discuss all your options with a professional who is very familiar with your state’s laws and regulations. There are tax implications involved when planning a College 529 Savings Plan, just like with any estate planning. The more planning you do now, the more you ultimately determine how the money is spent on the child the plan benefits. Paying off college debt or college loan interest payments is not an approved educational expense for 529 plans, so you do not want to risk the plan’s beneficiary ending up taking a penalty while the money works its way through the court system. Plan early and plan often.
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