Estate Planning and 529 Plans


Question: I have three grandchildren and want to start saving for their college education. Is opening a 529 Plan advisable? What are the implications with respect to my grandchild’s financial aid eligibility and my own estate plan?

Answer: When it comes to college financial aid and estate planning considerations, there is never a single right answer. Obviously contributing to your grandchild’s educational future is important and you do not want to put them or yourself in a worse position. The first part of this article will address the financial aid implications of 529 Plans and the second part will address your own estate planning concerns that may come into play when opening the 529 Plan.

A 529 Plan’s impact on financial aid depends on who owns it. When filling out the Free Application for Federal Student Aid (hereinafter “FAFSA”), income and assets of the parent and student are all reported. If the 529 Plan is owned by the parent or student, it is considered an asset. If the 529 Plan is owned by the grandparent, it is not considered an asset; however, distributions from the Plan can be considered income to the student. Income reduces financial aid more than assets. For example, if the 529 Plan is owned by the parent and has $20,000.00, the financial aid is reduced by approximately $1,128.00. If the same 529 Plan is owned by the grandparents and a distribution is taken for the full amount, the income to the student can decrease the aid by $10,000.00. Income verification is usually requested two years prior to the school year (for 2019/2020 school year, 2017 income verification will be required). Therefore, it is advisable if the grandparent owns the 529 Plan, the student should hold off distributions until the second half of his or her sophomore year to reduce the impact on aid.

With respect to your own estate planning, if you are the owner of the 529 Plan, the asset is considered yours for Medicaid purposes. In order words, if you or your spouse need to rely on Medicaid at home or in a facility, the value of the 529 Plan will come into play. As you may be aware, if you or your spouse applies for Chronic Medicaid to cover the cost of care in a nursing facility, there is a five year lookback on all financial accounts. This would include 529 Plans. If withdrawals are made to the student within the five year period immediately prior to an application for Chronic Medicaid benefits, it may be counted as a transfer and the applicant would be penalized accordingly (for every $13,407 transferred, one month penalty is assessed).

When considering your estate planning and college savings for your grandchild it is important to discuss with professionals in your area that are familiar with the implications of 529 Plans. As you can see, there are many facts that may dictate whether a 529 Plan is appropriate and who the owner of the plan should be in order to maximize financial aid eligible and asset protection.


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Burner Law Group, P.C.

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