Grandparent-Owned 529 Plans

A 529 plan is a popular savings vehicle that is used to save for future college expenses. It offers the benefit of tax-deferred growth and tax-free withdrawals for qualified education expenses. Typically, a parent owns the 529 plan for the benefit of their children. Less common are grandparent-owned 529 plans for the benefit of their grandchildren.

Increasingly, though, we are having conversations with grandparent-clients who are interested in setting funds aside for their grandchildren’s college. Changes over the past couple years have reduced the negative effects grandparent-owned 529 plans on financial aid, and scholarships.

Financial Aid

Federal financial aid includes grants, work-study, and loans. The Free Application for Federal Student Aid (FAFSA) form is completed annually and used by most public colleges to determine how much federal financial aid a student is eligible to receive. Many private colleges also require the College Board’s College Scholarship Service Profile (CSS Profile) for their own financial aid.

What Changed?

Previously, the grandparent-owned 529 plan assets were not reportable on FAFSA, but when distributions were made to the student to pay for college expenses, the distribution was counted as the child’s income, which consequently had the greatest negative impact on financial aid.

Under current federal rules, neither the account balance nor distributions from a grandparent-owned 529 plan are reportable on FAFSA. This is a big benefit for students who attend public colleges with the intention of using some form of financial assistance.

Things to Consider

  • If you have a grandchild who attends a private college that requires the CSS Profile, the grandparent-owned 529 plan—similar to parent-owned 529 plans—will be treated as an available resource, resulting in a reduction of the school’s own financial aid offer.

  • Grandparents keep full legal ownership and control of the grandparent-owned 529 plan, allowing them to decide when and how much to contribute, direct investments, choose withdrawal timing, and even change the beneficiary.

  • Contributions to a 529 plan can reduce the grandparent’s taxable estate since 529 plans are excluded from estate tax. Also, depending on the state a grandparent lives in, they may be eligible for state income tax benefits (e.g., tax credit or deduction) for contributions they make to their grandparent-owned 529 plan.

  • As owner of the 529 plan, the grandparent can take back the money by distributing it to themselves. However, the earnings portion on distributions—that are not used for qualified education expenses— is subject to ordinary income taxes plus a 10% penalty.

  • Saving for your grandchildren’s education can potentially give their parents the opportunity to focus more on saving for their own retirement and other financial goals. However, a natural concern is that parents could consciously or subconsciously dial back their own saving efforts.

Striking the Right Balance

Grandparent-owned 529 plans are one of the more tax-efficient and legacy oriented tools available. The key is treating them as a coordinated piece of a broader family wealth strategy rather than a standalone solution. That starts with conversations between grandparents and parents, setting clear expectations, transparency, and integration with the parents’ own educations savings efforts.

As always, reach out to your Tanglewood Wealth Advisor if you would like to discuss a grandparent-owned 529 plan to help save for your grandchildren’s education.

Disclosures

Half a Century of Independence–And Why it Matters More than Ever

Most formerly independent wealth management firms have been sold to big institutions. Tanglewood Total Wealth Management remains independent. That means a lot to me, our team, and especially our clients. I believe it should be to you, too.

When I say “independent,” I mean that Tanglewood does not have to meet the sales goals or use the investment products set out by some other institution. We control every aspect of the total wealth management service Tanglewood provides for our clients – the friends, families, and businesses that rely on us. We can always put Clients First!

We are free to serve our clients the way we know best. There are no outside “owners” pushing higher cost products so they make more money. Nobody is telling us to cut back on service, or compromise on the people we hire, or on the quality or extent of the fee-only, fiduciary advice that has been the backbone of our client relationship since day one.

Tanglewood is independent because it allows us to meet the ever-changing needs of our clients. We have taken on the responsibility of advising our clients on the continuous flow of new laws that govern areas such as inherited IRAs, RMDs, Roth conversions, donor-advised funds, QCDs, and Medicare Part B premiums. We educate our clients about the tremendous value of lifetime tax planning. We have developed our talent and adapted our technology to keep pace with work that has, candidly, become more complex at an almost geometric rate.

We are independent because we understand what it means to be responsible for our clients’ total well-being. In just the past year we have put on events for our clients on cybersecurity, aging advocacy, evaluating Medicare alternatives, and much more. Our clients can expect a lot more events like this in 2025. There is so much more to wealth management than just a balance sheet. Money touches every part of our clients’ lives in one way or another, and we’ll continue to help them make the right choices on their own journeys.

We are independent because of our wonderful clients. Thanks to their trust in our services, we don’t need to scramble to handle an internal succession crisis. We don’t need to sell a piece of ourselves to modernize a business that hasn’t kept up with its clients.

I’ve been at this now for nearly half a century. And in that time, I’ve found that I’m happiest when clients tell me how important Tanglewood has been to their financial stability and peace of mind. I have watched the families we serve come of age. Some of the young children of my original clients are now retiring (amazing!) and we are helping them with their retirement needs as well as the planning needs of their kids.

That means the world to me. And that is why we are proud to say Tanglewood Total Wealth Management is independent. No catch, no asterisk or disclaimer. We couldn’t do this without being there with our clients every step of the way. This is what independence has meant to me.

We can’t wait to show you even more of what our independence allows us to do for you and the people you care about.

Titling Joint Assets – An Integral Part of an Estate Plan

How property is titled is a crucial part of any well-designed estate plan. The lack of coordination between asset ownership and estate planning documents can inadvertently lead to unwanted consequences.

Many of our clients own joint accounts that are either titled as Tenants in Common (TENCOM) or Joint Tenants With Rights of Survivorship (JTWROS). The difference can significantly affect the asset distribution outcome.

Tenants in Common

Assets that pass through a will are referred to as probate assets. A typical example is a TENCOM account. It is owned by multiple individuals who each have a separate, but undivided interest. At death, the decedent’s share must go through probate and follows the will’s instructions.

Joint Tenants with Rights of Survivorship

In a JTWROS account, each owner has an undivided interest and survivorship rights. This means a decedent’s share passes to the surviving owner(s) by “Operation of Law”, therefore – bypassing probate – and independent of the will’s instructions. For spouses, a JTWROS account can be an efficient way to pass assets to each other at the first death in the right circumstances, such as spouses who have no children or simple wills leaving assets outright to each other.

Effect on the Estate Plan

Oftentimes, one or both spouses want to ensure that their children (or children from a previous marriage) inherit assets. Their estate plan may incorporate the creation of a trust that provides income and/or principal to their surviving spouse and children. A TENCOM accomplishes this since the deceased spouse’s half of the account flows through the estate to fund the trust. The other half is distributed outright to the surviving spouse.

However, a JTWROS account may completely negate a planning strategy that called for the creation of trusts. Unless there are other funds earmarked. The JTWROS assets will transfer outright to the surviving spouse and not be available to fund the trust.

Avoiding probate at death is a goal that more people are incorporating in their estate plans. Accounts that transfer assets directly to their intended heirs can accomplish this. Should this be your goal, make sure a separate account is set aside which can be easily accessed by your executor. This is to provide funds for final bills, funeral expenses, costs, and taxes related to settling the estate.