While a 529 plan account (a “529”) does not seem like a part of your estate plan, it is. New York’s 529 College Savings Program accounts are investment plans that enjoy tax-deferred growth. Withdrawals are income tax-free for qualified educational purposes associated with K-12 tuition, vocational school, college, or higher education. If money is withdrawn for a non-qualified purpose, the withdrawal is taxed as income to the beneficiary.
There can only be one owner and one beneficiary at a time for each 529. However, a successor owner can be named in case an owner dies or becomes incapacitated. Anyone over the age of eighteen can open a 529. You can open a 529 for the benefit of anyone of any age if the beneficiary is a U.S. citizen or legal resident. Because most accounts are opened by a parent or grandparent for the benefit of a minor, it is possible a beneficiary will not use all the funds in the account before the owner dies.
In New York, when a 529 owner passes away and does not name a successor owner, the account cannot be accessed until a successor is appointed by the Surrogate’s Court in the county where the initial owner was a resident. This leads to additional expenses for the initial owner’s estate and may delay the beneficiary’s access to funds they rely on to pay for educational expenses. A 529’s value does not impact a deceased owner’s estate value for tax purposes, but it does affect the estate’s value for Surrogate’s Court purposes and ultimately contributes to the type, complexity, and cost of the proceeding needed.
Naming a successor owner will allow ownership to automatically pass upon the initial owner’s death and will not affect a beneficiary’s access to funds on which they may be actively relying. An owner may also consider transferring ownership to the beneficiary if he or she is a mature, legal adult and you are comfortable the funds will be used as you intended. While ensuring a smooth transition of ownership is important, you may also want to consider how you can contribute to a 529 after your passing. Collaborating with your estate planning attorney and accountant will ensure your priorities during life survive you and can be efficiently accomplished after your passing.
Erin Cullen, Esq. is an associate attorney at Burner Prudenti Law, P.C., focusing her practice areas on Trusts and Estates. Britt Burner, Esq. is the Managing Partner at Burner Prudenti Law, P.C., focusing her practice areas on Estate Planning and Elder Law. Burner Prudenti Law, P.C. serves clients from New York City to the East End of Long Island, with offices located in East Setauket, Westhampton Beach, Manhattan, and East Hampton.