How to Use a Family Dynasty 529 Plan for Multigenerational College Planning

According to the Bureau of Labor Statistics, individuals with 4-year college degrees earn, on average, almost $25,000 more per year than those who never attended college, while those with professional degrees earn over $60,000 per year more than those who never attended college. Yet, given the steep price of a college education and the high amount of education-related debt that many individuals end out carrying for decades after they graduate, the decision to attend college and earn a degree is often questioned, especially by those who have to pay their own way through school.

For those who are fortunate enough to have parents and/or grandparents with the desire and means to pay some or all of the cost of a higher education, however, 529 plans offer a tax-efficient means of saving and paying for college expenses. Notably, distributions from 529 plans are tax- and penalty-free to the extent that they are used for the beneficiary’s qualifying education costs.

They also enjoy a number of unique features that set them apart from other tax-favored accounts, such as an IRA or 401(k), in that there are no annual contribution limits, but rather, a total maximum balance (which varies by state), after which additional contributions are prohibited. However, not only are those maximums quite substantial (currently ranging between $235,000 and $529,000), but individuals can “own” more than one 529 plan account, there is no limit to how large those tax-deferred accounts can grow and, from time to time,  both the beneficiary (which can be only one person at any given time) and the account owner can generally be changed… often without any tax consequences. Moreover, in the event that multiple family members have qualified education expenses at the same time, partial transfers of 529 plan assets to a new beneficiary can be made.

Which means that individuals who have both the means and desire can ‘overfund’ one or more 529 plan accounts (either by making periodic contributions over many years or by a large lump sum contribution), effectively creating a “Dynasty 529 Plan”, which can be used to pay for qualified education expenses of not only their children and grandchildren (or any number of qualified members in their extended family), but potentially for multiple generations of family members to come. This is a strategy that can be very beneficial to Middle-Class Millionaires, if done properly.

Given the potential for perpetual tax-free growth, a Dynasty 529 plan can be an attractive strategy that affluent families can use in order to provide a legacy of education for their family. However, your advisor here at Kendall Capital must be careful when implementing such a strategy, as there are potential gift tax and Generation-Skipping Transfer Tax (GSTT) implications to navigate, maximum contribution limits to consider, and different features across states (where some states consider changes in ownership a distributable event). Meanwhile, there’s also a risk that any number of future events may derail a carefully crafted Dynasty 529 plan, including potential changes in 529 plan transfer rules, the possibility that Congress could decide to make a college education available to everyone at no cost, and the chance that future account owners may decide to simply cash out the plan for their own use (which could be mitigated, however, by creating a trust, which could serve as the account owner).

Ultimately, the key point is that, while the cost of higher education is more expensive than ever, a college degree is still one of the most reliable predictors of future income and wealth, and as such, helping family members obtain one is a common goal for Middle-Class Millionaires who understand the importance of education and are in a position to offer their help. And especially for affluent families, a Dynasty 529 plan can be an effective tool to capitalize on the significant and unique tax benefits and flexibility offered by 529 plans, making them an attractive option for providing legacy educational support for many generations to come.