Reasons Why a Grandparent-Owned 529 May Make Sense

So your grandchild has college in their future. When deciding how to support their education goals, consider a 529 plan, which offers benefits to grandparents as well as the student. Here are some reasons why grandparents may want to consider funding a 529 plan.

Control over assets

A grandparent can choose to fund and remain the owner of a 529 to benefit a grandchild. If they do, they retain control over the account. That means if they need access to the funds for some reason, they can make a non-qualified distribution. This may provide some peace of mind for grandparents who are concerned about making gifts and losing control over those assets. However, the non-qualified distribution would be subject to reporting the earnings portion as income on their tax return and also be subject to a 10% penalty on the earnings portion.

Advantages for estate planning

At the same time, there are some tax advantages for grandparents funding a 529 plan.

  • Funding 529 plans provided an option for removing assets out of an estate. This may be appropriate for grandparents who are reaching a time where they are interested in reducing the size of their estate
  • In addition, the unique provision which allows five years’ worth of gifts to be contributed all at once up-front can transfer significant assets out of an estate, especially if there are multiple grandchildren*

Consider this example of two grandparents front-loading gifts to five grandchildren.