Is a 529 Plan Included in My Estate?

A 529 plan serves as a tax-advantaged savings vehicle specifically designed to help individuals save for future education expenses. These plans are commonly used to fund qualified costs such as tuition, fees, and room and board at eligible educational institutions. In the context of estate planning and taxation, an “estate” broadly refers to an individual’s accumulated assets and liabilities at the time of their passing. This collection of assets may become subject to federal or state estate taxes. Understanding how a 529 plan interacts with an individual’s estate is important for those planning their financial legacy and seeking to minimize potential tax burdens.

How 529 Plans are Structured

A 529 plan involves several distinct roles that define its structure and operation. The individual who establishes and primarily manages the account is known as the account owner. This person retains control over the funds within the plan, including investment decisions and the timing of distributions. The account owner also holds the authority to change the designated beneficiary or even reclaim the funds, though reclaiming funds for non-qualified expenses can incur taxes and penalties.

The beneficiary is the individual for whom the funds are saved and who is intended to receive the educational benefits. While the beneficiary is the ultimate recipient of the plan’s advantages, they do not possess control over the account’s assets.

Another significant role is that of the successor owner. This individual is designated by the original account owner to assume control of the 529 plan upon the original owner’s death or incapacitation. Naming a successor owner can help ensure the continuity of the plan and avoid potential delays or complexities associated with the probate process.

Federal Estate Tax Treatment for Account Owners

For federal estate tax purposes, the full value of a 529 plan is not included in the account owner’s gross estate upon their death. This is an exception to typical estate tax rules. Internal Revenue Code Section 529(c)(4) provides that no amount from a qualified tuition program shall be included in an individual’s gross estate. Contributions to a 529 plan are considered completed gifts for tax purposes, effectively removing the assets from the donor’s taxable estate immediately.

However, a specific exception to this general exclusion exists when an account owner utilizes the “five-year gift tax election,” also known as “front-loading” or “superfunding.” This election allows an individual to contribute a lump sum to a 529 plan that exceeds the annual gift tax exclusion limit—currently $19,000 per beneficiary for individuals in 2025, or $38,000 for married couples—and treat it as if it were made ratably over a five-year period. For instance, an individual could contribute up to $95,000 in a single year ($190,000 for married couples) to a beneficiary’s 529 plan and elect to spread this gift over five years for gift tax purposes.

If the account owner dies within this five-year period, a pro-rata portion of the original contribution may be included back in their gross estate. For example, if an account owner front-loaded five years of contributions and dies in the third year, the contributions allocated to the remaining two years would be pulled back into their estate for federal estate tax calculation. This inclusion only applies to the unallocated portion of the front-loaded gift, not the entire plan value or any appreciation.

The death of the 529 plan’s beneficiary does not result in the inclusion of the plan’s assets in the account owner’s estate. The account owner retains the flexibility to name a new beneficiary, provided they are a qualified family member, without triggering adverse tax consequences.

Federal Estate Tax Treatment for Successor Owners

When a successor owner takes control of a 529 plan, the federal estate tax implications upon their death differ from those of the original account owner. The assets within the 529 plan are not included in the successor owner’s gross estate. This is because the successor owner did not contribute the funds to the plan themselves. Their role is primarily administrative, overseeing the account for the benefit of the designated beneficiary.

A successor owner assumes the rights and responsibilities of the original account owner, including the ability to manage investments and direct distributions. Since the funds originated from the initial contributor, the successor owner is not considered to have made a gift for estate tax purposes. The value of the 529 plan is not subject to federal estate tax upon the successor owner’s passing.

This treatment assumes the successor owner did not make their own contributions to the plan that would trigger separate gifting rules. If a successor owner contributes their own funds to the 529 plan, those specific contributions would be subject to the same federal gift and estate tax rules as any other account owner.

State Estate and Inheritance Tax Considerations

Beyond federal regulations, individuals should also consider state-level estate and inheritance taxes, as their treatment of 529 plan assets can vary. While federal estate tax laws apply uniformly across the United States, states have the authority to impose their own taxes on estates or inheritances. These state laws may have different rules regarding the inclusion or exclusion of 529 plan assets.

Some states align with the federal approach, excluding 529 plan assets from the taxable estate because contributions are considered completed gifts. Other states might have specific provisions or thresholds that could lead to different outcomes. State estate tax exemption levels are significantly lower than the federal exemption, meaning an estate not subject to federal tax might still owe state estate tax.

Some states levy an inheritance tax, which is paid by the heir rather than the estate itself. The applicability of inheritance tax to 529 plan assets depends on the relationship between the deceased account owner and the inheritor, such as the successor owner or beneficiary. Certain relationships, like lineal descendants (children or grandchildren), may be exempt from inheritance tax in some states.