Are 529 Plans Included in a Taxable Estate?

A 529 plan serves as a tax-advantaged savings vehicle specifically designed to help individuals save for future education expenses. These plans allow contributions to grow tax-deferred, with withdrawals being tax-free when used for qualified educational costs, such as tuition, fees, and room and board. A “taxable estate” refers to the total value of a deceased person’s assets that are subject to federal estate tax upon their death. This article clarifies how 529 plans are treated for federal estate tax purposes, addressing whether contributions made to these plans are included in the donor’s taxable estate.

Understanding 529 Plans and Estate Tax Basics

Generally, anyone can contribute to a 529 plan, and the account owner, often the contributor, typically retains control over the investments within the account and can change the beneficiary. The federal estate tax applies to the “gross estate,” which encompasses all assets owned or in which the decedent had certain interests at the time of death, valued at their fair market value. This tax primarily affects high-net-worth individuals, as there is a substantial exemption amount. Most estates do not reach this threshold and therefore are not subject to federal estate tax.

Estate Inclusion for 529 Plan Contributions

Contributions made to a 529 plan are generally not included in the donor’s gross estate for federal estate tax purposes. This exclusion removes the contributed assets from the donor’s estate immediately. The Internal Revenue Service (IRS) treats contributions to a 529 plan as “completed gifts” at the time they are made.

This unique treatment means that even though the donor often retains certain powers, such as the ability to change the beneficiary or control the investments, the assets are considered transferred out of their ownership for estate tax purposes. This contrasts with many other types of gifts where the donor must relinquish all control for the assets to be removed from their taxable estate. Furthermore, these contributions can qualify for the annual gift tax exclusion, allowing individuals to contribute up to a certain amount per beneficiary each year without incurring gift tax or reducing their lifetime gift tax exemption.

The Five-Year Gift Tax Election

While 529 plan contributions are generally excluded from the donor’s estate, a specific rule applies when a donor utilizes the five-year gift tax election, also known as superfunding. This election allows a donor to contribute a lump sum amount to a 529 plan, equivalent to up to five years’ worth of the annual gift tax exclusion, in a single year. For instance, in 2025, an individual could contribute up to $95,000 ($19,000 annual exclusion multiplied by five years) to a beneficiary’s 529 plan, treating it as if the gift were spread ratably over that five-year period.

An implication of this election arises if the donor dies before the end of the five-year period. In such a scenario, a pro-rata portion of the accelerated gift amount is included back in the donor’s gross estate for federal estate tax purposes. For example, if a donor makes a five-year election and passes away in the third year, two-fifths of the original accelerated gift amount would be pulled back into their estate. This rule prevents individuals from using large, accelerated gifts to bypass estate tax while still maintaining control for a period.

Successor Ownership and Beneficiary Estate Considerations

When the original account owner of a 529 plan passes away, the plan typically continues under the control of a designated successor account owner. Many plans allow the original owner to name a successor when establishing the account, ensuring a smooth transition of management. The assets within the 529 plan are generally not included in the successor account owner’s taxable estate, as they are merely assuming control over existing funds rather than “owning” them in a manner that would trigger estate tax.

Similarly, the assets held within a 529 plan are usually not included in the beneficiary’s taxable estate if the beneficiary dies. The beneficiary does not possess ownership of the funds; instead, they hold a right to utilize the funds for qualified education expenses. In the event of a beneficiary’s death, the account owner typically has options, such as changing the beneficiary to another eligible family member without adverse tax implications, or taking a non-qualified withdrawal, which would result in income tax on earnings but would not generally impact the deceased beneficiary’s estate for estate tax purposes.