In this season of high school graduations, many parents are crossing their fingers and hoping they've put aside enough money to last the next four years of college tuition. But the timing on these things doesn't always work out as planned.
It's not just that a 529 plan may not be enough to cover four years of higher education. Some students and parents may be dealing with a more serious concern: what happens if the students lose their parents halfway through the saving process of a 529?
Other parents may have a different, more fortunate type of concern: thanks to scholarships or tuition costs that came in lower than expected, or kids finishing school early, or investments that performed better than expected, there are 529 plans that end up with too much money in them.
Luckily, both situations can be remedied with a little planning.
For parents, especially older ones, who are worried they won't be around when the 529 plan comes to fruition, the key is to carefully name a successor to the plan. The successor takes control of the plan's assets if the parent dies or is otherwise incapacitated. That successor can change pretty much any decision about the money in the plan, including who it should be spent on. So parents need to be especially careful that the successor knows and is willing to carry out their wishes.
Without a named successor, the beneficiary takes control of the account upon the owner's death. While we'd all like to think that person would use the money for college tuition, as intended, it might be nice to ensure the money doesn't go toward a sports car on the beneficiary's 16th birthday instead. In addition to blowing his or her college money, that erstwhile student might also be responsible for tax penalties on the 529 assets.
For grandparents who have set up 529 plans for their grandchildren and are worried they may be nearing the end of their life, there is a simple solution. They are entitled to transfer ownership of the account to the child's parents. It's also possible to transfer ownership directly to the beneficiary, although this may potentially incur gift taxes. An important protection for many grandparents: if your trust in the child's parents is less than absolute, the parent does not need to be named as the successor to the plan.
Another safeguard: specify in your will that the executor is to use the 529 money for college tuition as you intended. The value of the 529 will not be considered part of your estate for estate tax purposes.
