529 Accounts: What Happens After Death?

529 accounts (also known as 529 plans, and referred to in this blog post simply as "529," "529s," or 529's") are tax-advantaged savings plans designed for the future “qualified education expenses” of a designated beneficiary (more on what counts as a “qualified educational expense” here). State governments, state agencies, and academic institutions sponsor these plans, authorized by Section 529 of the Internal Revenue Code. Earnings in a 529 grow federal tax-free and will not be taxed when the money is used to pay for qualified education expenses.

Many clients have 529s for their children and grandchildren. Some even have them for themselves. The 529 owner is the person who creates the account. While 529 owners are typically the primary contributors, others can also contribute. The designated beneficiary of the 529 is the student (or future student) who will benefit by using the funds in the account for qualified education expenses.

The contractual terms of 529s vary. These terms control what happens to the account if the owner or the primary beneficiary dies. If you are the 529 owner, you must review these and, when possible, take action to ensure the plan is secure upon either your or the beneficiary's death.

When the 529 owner dies: Some plans allow the owner to name a successor/contingent owner (to take over when the first owner dies); others require the 529 ownership to transfer to the designated beneficiary. If your plan allows naming a successor/contingent owner, you should take advantage of this. For plans that do not allow naming a successor/contingent owner, and the beneficiary is still a minor (under age 18), ownership will go to the beneficiary's parent or legal guardian.

If the 529's designated beneficiary dies before using the funds in the account, the 529 owner generally has two options. The first option is withdrawing the 529 balance. The second option is changing the 529's designated beneficiary (typically, the new beneficiary must be a relative of the deceased beneficiary).

529s are essential parts of many people's plans for future education costs. Taking steps now to secure your 529 in the event of your or your beneficiary's death is a necessary, but often overlooked, part of estate planning.