Often referred to simply as a “529,” prepaid college accounts (referred to here as “529 college accounts” or “529 plan”), 529 college accounts can be a great way to save for college for children or grandchildren. But there is a lot to know about these accounts and how they work, and understanding how these plans operate begins with an understanding of the terms used.
There are 4 basic terms you should know if you are considering a 529 college account.
But before we get to that, let’s review some of the basics of 529 college accounts.
What is a 529 College Account?
Generally speaking, a 529 college account is a pre-paid plan that allows you to put money aside to pay for college for a child or grandchild.
In addition to providing an easy way to save for college, 529 college accounts also offer tax advantages to the owner of the account.
For federal gift tax purposes, contributions to a 529 college account are viewed by the IRS as completed gifts made to the student. As such, contributions to the 529 plan can be made up to the federal gift tax limit—without having to pay federal gift taxes.
There are, however, certain restrictions and filing requirements that apply here, so please consult with an experienced estate lawyer.
It is important to know that each state in the nation has its own rules and regulations governing 529 college accounts and those rules can vary widely. So if you live in Florida, be sure to consult an estate planning attorney near you to find out more.
Florida offers two types of 529 college accounts: a pre-paid tuition program and a 529 savings plan. You must, however, be a Florida resident in order to open a 529 college account.
Each 529 plan has its own requirements, advantages, and disadvantages to consider. Often, choosing the right plan for you can be the hardest part of opening a college account. An experienced estate and probate lawyer can help you decide which plan meets your needs best.
How 529 College Accounts Work
Depending on where you live and the company running the fund, a 529 college account owner will have more or less flexibility and control over the investments in the fund.
In general, account owners do not directly manage the 529 plan themselves. These accounts are more in the nature of mutual funds, and, like mutual funds, they are controlled by someone other than the owner. Also, the investment options available for these funds can vary greatly. Most 529 plans have predetermined investment strategies based on the beneficiary’s age. Depending on where you live, you might have several options available, or very few.
While investing in a 529 college account can be beneficial for both the account owner and the student, there are factors that must be carefully considered —especially if you are a grandparent.
For example, if you set up the 529 plan as a grandparent and you remain the owner of the plan, and sometime down the road you apply for Medicaid to cover the costs of nursing home care, the funds in the 529 plan will count towards your available assets.
A 529 plan can also interfere with a student’s ability to get financial aid. There are solutions to these problems, of course, so be sure to discuss 529 plans with an experienced probate lawyer before setting up a 529 college account.
Finally, before you open a 529 account, there are some basic terms that apply to 529 college accounts that you should understand.
Here are just four of them.
4 Basic Terms You Should Know if Considering a 529 College Account
1. Beneficiary
This one is pretty straightforward. The “beneficiary” of a 529 college account is the student that the account will benefit.
The 529 plan beneficiary can be a child, grandchild, or even yourself. There are some limitations on who can be a beneficiary, however. Beneficiaries must be U.S. citizens, or resident aliens with a valid Social Security number or other taxpayer identification number.
2. Account Owner
Another fairly obvious term, but an important one to know nonetheless. The account owner is the person who sets up and pays into the 529 college account (i.e., you).
As noted above, depending on the plan and your state’s rules, as the account owner, you may have more or less of a say in how your money is invested. In any event, as the owner, you will have certain rights. For example, as the account owner, you may change the beneficiary.
3. Balanced Fund
This term refers to a mutual fund that is directed to providing growth and income. Balanced funds often accomplish these dual goals by investing in a variety of stocks and bonds.
4. Active Management
There are many ways to invest in college funds so please consult with professionals before deciding what to do.
In addition, while these funds are similar to mutual funds, they are not mutual funds. Thus, you may have available investment options that allow you to actively manage the fund.
Active management of a fund means that the funds in the account are not simply on “set and forget” mode. Rather, they are managed by an investment professional who chooses investments according to a specific strategy.
Your child’s or grandchild’s college future is important. And 529 plans just might make college more affordable. If you have any questions or would like to learn more, please contact an experienced estate and probate lawyer.
Talk to Our Estate Planning Attorneys
Since 2011, SJF Law Group has been helping clients in Broward, Miami-Dade, and Palm Beach counties protect their families through estate planning, probate administration, and trust administration. Our law firm is pleased to offer both in-person and virtual appointments throughout the State of Florida, ensuring our services are accessible no matter where you are located. We pride ourselves on combining the personalized service and attention of a boutique law firm with the talent and legal acumen of a large firm. Our experienced estate planning attorneys work hard to ensure that your wishes will be followed, and your loved ones taken care of when you are gone.
If you want to discuss your specific situation with our experienced estate planning lawyers, please contact SJF Law Group at 954-580-3690. You can also fill out our contact form. We take pride in responding to inquiries in a timely manner.