Although 529 plans are primarily designed to help pay education expenses, they can also be useful estate planning and gifting tools, particularly for parents and grandparents who want to transfer assets to younger generations while retaining a degree of control over how those assets are used.

Moving Assets Out of Your Estate

Contributions to a 529 plan are generally treated as completed gifts to the beneficiary for federal gift-tax purposes, even though the person establishing the account may continue to control the account. This combination can be attractive from an estate planning perspective. A grandparent, for example, can contribute money to a grandchild's 529 account and generally remove the contributed assets—and their future appreciation—from the grandparent's taxable estate, while still retaining control over the account as its owner. Subject to an important exception involving the special five-year gifting election, amounts contributed to a 529 plan generally are not included in the contributor's gross estate (irs.gov). For families with potentially taxable estates, that can make a 529 plan useful for accomplishing two objectives simultaneously: helping the next generation with education expenses and transferring wealth out of an estate.

The Five-Year Gift-Tax Election

One of the most distinctive estate planning features of a 529 plan is the ability to accelerate several years of annual exclusion gifts into a single contribution. Normally, contributions to a 529 account count toward the federal annual gift-tax exclusion for the beneficiary. However, federal tax law permits a donor who makes a sufficiently large contribution to elect to treat a portion of that contribution as though it were made ratably over a five-year period. (irs.gov)

For example, when the annual gift-tax exclusion is $19,000, an individual could contribute as much as:
$19,000 × 5 years = $95,000
to a beneficiary's 529 account and elect to spread that gift evenly over five years for gift-tax purposes.

A married couple could potentially contribute:
$190,000
for the same beneficiary, assuming each spouse qualifies for and properly makes the applicable gifts and elections.

This strategy is sometimes referred to as “superfunding” a 529 plan. The federal annual gift-tax exclusion is periodically adjusted for inflation. As a result, the $19,000 annual exclusion—and therefore the $95,000 individual and $190,000 married-couple five-year amounts discussed above—may increase in future years. Before making a significant 529 contribution, investors should check the IRS website for the annual gift-tax exclusion applicable to the year in which the contribution is made and consult with their tax or estate planning professional as appropriate The election is generally reported on a federal gift-tax return, Form 709. Additional gifts to the same beneficiary during the five-year election period need to be coordinated carefully because they may have additional gift-tax consequences. (irs.gov)

Why Making a Larger Contribution Earlier Can Matter

In addition to the estate planning benefit, funding a 529 earlier can give the investments more time to potentially grow. Consider a grandparent who intends to contribute money toward a newborn grandchild's future education. Rather than making smaller contributions each year, the grandparent might make a larger contribution when the child is young.

Doing so can accomplish several things:

• Assets may be removed from the grandparent's taxable estate sooner.
• The money has a longer period in which to potentially grow.
• Future investment earnings generally accumulate without current federal income taxation.
• Qualified withdrawals can ultimately be received free of federal income tax.
• The grandparent can generally remain the account owner and control distributions from the account.

The potential for many years of tax-advantaged compounding can make early funding particularly valuable.

Retaining Control While Making a Gift

The ability to retain control is one feature that distinguishes a 529 contribution from many other gifting strategies. If a grandparent simply gives cash or securities directly to a grandchild, the grandparent generally gives up control of those assets. Similarly, assets placed into certain custodial accounts eventually become the child's property to control when the child reaches the applicable age. With a 529 plan, the account owner generally retains control. The beneficiary does not normally have the right to withdraw the money simply because he or she reaches adulthood. The account owner generally decides how the money is invested within the plan's available investment choices and when distributions will be made. If the original beneficiary does not need all of the money, the account owner may also be able to change the beneficiary to another qualifying family member  without federal income-tax consequences. This combination of gifting, potential estate reduction and retained control can make a 529 plan especially appealing to grandparents.

Creating an Education Legacy for Multiple Generations

A 529 account can also be incorporated into a broader multigenerational planning strategy. Suppose grandparents establish and fund 529 accounts for several grandchildren. If one grandchild receives a scholarship or does not use the entire account, the family may have several alternatives rather than simply withdrawing the unused money.

Depending on the circumstances, the account owner may be able to:

• Change the beneficiary to another qualifying family member.
• Leave the money invested for the beneficiary's future educational needs.
• Use the account for graduate school or other qualifying education.
• Pay certain qualified student loan obligations.
• Use funds for certain apprenticeship or credentialing programs.
• Transfer eligible funds to a Roth IRA for the beneficiary under the SECURE 2.0 rules.
• Preserve the account for another qualifying family member's future education.

As a result, a well-funded 529 account can potentially benefit more than one generation of a family.

An Important Estate Planning Consideration

There is an important exception for individuals using the five-year gift-tax election. If a donor elects to spread a large 529 contribution over five years and then dies before the five-year period is completed, the portion of the contribution allocated to calendar years after the donor's death is generally included in the donor's gross estate for federal estate-tax purposes. (irs.gov) For that reason, substantial 529 contributions should be coordinated with the family's broader estate and gift-tax strategy.

Education Planning Can Also Be Legacy Planning

For many families, helping children or grandchildren obtain an education is itself an important part of their legacy. A 529 plan provides an unusual combination of benefits: the opportunity to make meaningful gifts during your lifetime, potentially remove assets and future appreciation from your taxable estate, retain control over the account, and provide funds that may ultimately be withdrawn tax-free for qualified education expenses. For grandparents in particular, a 529 plan can therefore be more than a college savings account. It can be a practical way to transfer wealth with a purpose—helping the next generation build its future through education. Estate and gift-tax rules can be complex, particularly when large contributions, multiple beneficiaries, generation-skipping transfers or the five-year election are involved. Families considering significant 529 contributions should coordinate their education savings strategy with their financial, tax and estate planning professionals.