Can a Trust Own a 529 Plan?

A 529 plan is a tax-advantaged savings vehicle designed to help individuals save for qualified education expenses. Many people consider these plans for their children or grandchildren, and a common question arises regarding whether a trust can hold ownership of such an account. While 529 plans are typically established by individuals, there are specific ways in which trusts can play a role in their funding, management, and succession, offering distinct advantages for long-term educational and estate planning. Understanding these interactions is important for comprehensive financial strategies.

Understanding 529 Plan Ownership

A 529 plan requires an identified account owner and a designated beneficiary. The account owner is the individual who establishes the plan and maintains control over its assets, including the ability to make investment decisions, change the beneficiary, and initiate distributions. Typically, the account owner is an adult such as a parent, grandparent, or even the student themselves. Most 529 plans are structured for individual ownership.

While individual ownership is the common structure for 529 plans, certain types of trusts can, in specific circumstances, be designated as account owners. Some plans and state rules have expanded to permit irrevocable trusts to open or own 529 accounts. However, this is not universally true for all trust types or all 529 plans, and individual ownership remains the predominant model. The beneficiary, the student for whom the funds are saved, does not have legal control over the account, even upon reaching adulthood, unless it is a custodial 529 plan.

Ways Trusts Can Interact with 529 Plans

Even when a trust cannot be the direct account owner, there are several methods through which trusts can effectively interact with 529 plans to support educational goals. A trust can contribute funds to a 529 plan that is individually owned, such as by a parent or grandparent. This allows the trust’s assets to be utilized for educational savings without the trust directly owning the 529 account.

A significant way a trust can be involved is by being named as a successor account owner. This arrangement ensures continuity of the 529 plan’s management if the original individual account owner passes away or becomes incapacitated. The named trust, through its trustee, then assumes control of the 529 plan, allowing the original owner’s educational funding intentions to be carried out according to the trust’s terms. This can prevent the 529 account from going through probate and offers a layer of controlled succession.

A trust can also function as a beneficiary in specific scenarios, primarily involving Special Needs Trusts (SNTs) for individuals with disabilities. While the ultimate beneficiary of a 529 plan must always be an individual, an SNT can be structured to receive distributions from a 529 plan on behalf of a disabled individual. This specialized use helps ensure educational funds are available for the individual without jeopardizing their eligibility for means-tested government benefits like Supplemental Security Income (SSI) or Medicaid. The SNT acts as a conduit, managing the funds for the individual’s benefit according to IRS rules and state regulations.

A trust can hold assets that are specifically earmarked to fund 529 plan contributions. In this scenario, the trust itself does not own the 529 plan, but rather holds the capital that the trustee then directs to individually owned 529 accounts. This strategy can be useful for managing larger sums intended for multiple beneficiaries over time. This approach allows for strategic gifting from the trust to 529 plans, potentially leveraging annual gift tax exclusions while the trust retains flexibility over the underlying assets until they are contributed.

Implications of Trust Involvement

When a trust contributes to a 529 plan, the contributions are generally considered gifts to the 529 plan beneficiary. These gifts are subject to federal gift tax rules, though they can be made within the annual gift tax exclusion, which is $19,000 per recipient for 2025. A unique feature of 529 plans allows for “superfunding,” where up to five years of annual exclusion gifts can be made in a single year, totaling up to $90,000 for an individual or $180,000 for married couples, by filing a gift tax return to elect this proration.

For estate tax purposes, contributions to a 529 plan are typically removed from the donor’s taxable estate. This can be a valuable estate planning tool, especially for larger estates, as it reduces federal estate tax liability. Even if a trust owns the 529 plan, the assets generally avoid inclusion in the grantor’s estate.

Distributions from a 529 plan are tax-free at the federal level if used for qualified education expenses, which include tuition, fees, books, supplies, and room and board. Non-qualified withdrawals are subject to income tax on the earnings portion and a 10% penalty.

The involvement of a trust can also impact financial aid eligibility for the student beneficiary. Funds held in a 529 plan owned by a parent or the student are considered parental assets on the Free Application for Federal Student Aid (FAFSA), with an assessment rate of up to 5.64%. If a grandparent or a trust (not considered a parent for FAFSA purposes) owns the 529 plan, the assets are not reported on the FAFSA. Distributions from a grandparent-owned 529 plan were previously considered student income, but starting with the 2024-2025 academic year, this treatment has changed, reducing their impact on financial aid eligibility.

Utilizing a trust in conjunction with a 529 plan can offer greater control and flexibility in specific situations. A trust allows the grantor to establish clear guidelines for the use of funds, ensuring they are directed toward educational purposes, especially in complex family dynamics or for multi-generational planning. Unlike individual owners, a trustee of a trust-owned 529 plan is bound by fiduciary duties, meaning they must act in the best interests of the trust’s beneficiaries and adhere to the trust document’s terms.

For special needs planning, combining a Special Needs Trust with a 529 plan is a careful strategy to preserve eligibility for government benefits. While 529 plan assets are not considered countable assets for means-tested programs if owned by a parent, distributions directly to a disabled individual could affect their eligibility. An SNT, however, can receive distributions from a 529 plan and manage them for the individual’s benefit without compromising government assistance, provided the trust is properly drafted and administered. Rollovers from a 529 plan to an ABLE account (Achieving a Better Life Experience) are also permissible, offering another avenue for funding disability-related expenses while preserving benefit eligibility, though ABLE accounts have annual contribution limits.