Stages of Life & Estate Planning: 529s and Estates

by Jonathan A. Nelson

Education savings plans authorized by Section 529 of the Internal Revenue Code are a popular investment tool designed to make education more affordable by providing a series of tax benefits, when everything goes right.

Everything does not always go right.

By way of background, a 529 account is established by one or more Contributors (who upon providing the assets has made a completed gift which can thereafter grow tax free) and is held and administered by an Owner who does not have to be the Contributor.  The account has a Designated Beneficiary, and withdrawals from the account by the Owner are tax-free if then expended for qualifying education expenses of the Designated Beneficiary.  If the Designated Beneficiary ages out or does not need the funds, the Owner can change the Designated Beneficiary (usually to another family member to avoid tax consequences); thanks to a recent change in law, the Owner can now instead roll the account over to a Roth IRA for the Designated Beneficiary.  However, the Owner has full control of the account and can intentionally disregard the beneficiary designation if willing to pay the tax penalties for doing so.

One particular contingency is not well covered by law: if the Owner passes away and has not designated a successor Owner of the account, it becomes part of the deceased Owner's probate estate.  The Owner's Executor then has control of the 529 account, and not only can disregard the beneficiary designation, but may be required by state law to do so where creditors have not been paid or residuary beneficiaries have not consented to distribution of the account in a form continuing to benefit the Designated Beneficiary.

I suggest a few actions to help avoid this result:

1. Designate one or more successor Owners for any 529s you control.  This makes the change a non-probate transfer.

2. If you have a trust, consider making the Trustee the Owner or successor Owner.  Besides solving the succession problem, this allows greater continued control over the benefit the accounts provide, and it may be advantageous to have assets which can grow without the trust incurring income tax liability.

3. Include language in your will or trust specifically affirming 529 accounts continuing to be for the benefit of the Designated Beneficiary and giving the Executor or Trustee authority for Owner actions, including designating a new Owner.  (These provisions will be state specific and need to be tailored to how probate in your state needs to be concluded.)

Next in this series: Emptying the Nest

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Stages of Life & Estate Planning: Do College Students Need Estate Planning?

by Jonathan A. Nelson

Dinnertime conversation in a lawyer's house can get interesting. I have had to deal with whether it is accurate to call it "mom’s and dad's house" when it's in a trust, and whether an 8-year-old having a will would protect baseball cards and Legos (it can't - you have to be 18 or emancipated to sign a will; I may address estates of minors in a later post, but legal involvement is unusual). Taking the spirit of those discussions, though, we will look briefly at a few stages in life and the documents that are often helpful as life changes. Every situation is unique, and if we talk we will assess how your particular needs can best be met.

For college students with few assets and usually a lot of debt, often the most useful estate planning documents are a Durable General Power of Attorney and an Advance Medical Directive. For a college student, these are frequently made out to mom or dad. The Power of Attorney is really useful if the student gets into something over their head ("I have a big final tomorrow and my car was just impounded"), needs help moving money around (including for tuition), needs information for financial aid, or wants assistance handling transactions back home. The Medical Directive makes sure that the right person is designated to make emergency medical decisions regardless of what state the school is in, and provides access to medical history information that may be important to making those decisions intelligently.

Some instances where a will is helpful at this age are: adverse relationships with a parent or other family situations, assets requiring special or timely administration, inherited or contingent assets, or debts where the creditor needs to be prevented from controlling the estate. But generally, with few assets and parents being the heirs-at-law (and likely co-signers on debts), a will won’t usually change a lot compared to the default laws during this stage of life.

Next in this series: Professional Singles

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.