For the average high school student dreaming of a career with significant income potential and future wealth, attending college is often key to making these dreams a reality. According to the U.S. Bureau of Labor Statistics, individuals with a bachelor’s degree earn, on average, approximately $26,000 more per year than those with just a high school diploma — and those with professional degrees earn upwards of $57,000 more annually.1 Despite the promising future that college and professional degrees can unlock, the steep (and rising) cost of college admission can be too high for some families to bear. Fortunately, 529 plans can ease this financial burden by offering a way for people to save for their family members’ education expenses in a tax-efficient manner. With careful planning, this tax-advantaged savings vehicle can even be used to cover education expenses for generations to come.

Before diving into how 529 plans can be used for legacy planning, it is worthwhile to revisit the basics. 529 plans allow account holders to save for their family members’ education in a tax-efficient manner. While there is no federal tax break for 529 contributions, as long as the distributions are used for qualified education expenses, the earnings will not be subject to any federal income tax. Qualified expenses include college tuition, fees, books, and room and board, among others.

Recently passed laws have expanded how 529 plan assets can be used. The 2017 Tax Cuts and Jobs Act (TCJA) allows 529 account holders to use up to $10,000 of plan assets per beneficiary per year at private and religious K-12 schools.2 The SECURE (Setting Every Community Up for Retirement Enhancement) Act, passed into law in December 2019, expands qualified tuition expenses to include apprenticeship programs and allows 529 plan owners to use plan assets for the repayment of student loans, up to a lifetime limit of $10,000 per beneficiary (not adjusted for inflation).3 Owners that use 529 plan distributions for nonqualified expenses will incur ordinary income tax and a 10% penalty on the earnings portion (plus any state tax and/or penalties).

Unlimited Owner and Beneficiary Changes 

The key feature with 529 plans that makes legacy planning possible is that both the owner and the beneficiary can be changed an unlimited number of times. More specifically, 529 plans allow the account owner to change the beneficiary to a “qualifying family member” of the current beneficiary without tax consequences. Better yet, the Internal Revenue Code defines the term “qualifying family member” broadly to include the beneficiary’s:

  • Spouse
  • Son, daughter, stepchild, foster child, adopted child, or descendant
  • Son-in-law or daughter-in-law
  • Siblings or stepsiblings
  • Brother-in-law or sister-in-law
  • Father-in-law or mother-in-law
  • Father or mother or ancestor of either; stepmother or stepfather
  • Aunt, uncle, or their spouse
  • Niece, nephew, or their spouse
  • First cousin or their spouse4

Keep in mind, however, that even though 529 plans allow for unlimited owner and beneficiary changes, the designation of a new beneficiary matters when it comes to generation-skipping tax (GST). Similar to the gift tax, the GST has an annual exclusion amount of $15,000 (for 2020) per beneficiary, meaning that if a contribution to a 529 plan exceeds that annual amount, the owner is forced to file a GST return and use some of her or his GST lifetime exemption.5

529 plans also contain a special provision that allows a married couple to contribute one lump sum of $150,000 for one beneficiary (five years’ worth of their combined $30,000 annual gift tax exclusion amount). The caveat here is that if this lump sum contribution is made, the account owners cannot contribute any further dollars until five years have passed, unless they want to use up their combined gift/estate tax exemption of $23,160,000 (limit allowed in 2020). One tactic that is often used is to “overfund” the account as quickly as possible by making the $150,000 lump sum contribution every five years. Note, there are maximum contribution limits for 529 plans, so at a certain point the account owners are prohibited from making further contributions, but the 529 assets can continue to earn investment returns.

With that said, these maximum contribution limits are “reset” with each beneficiary change. It is also important to note the maximum aggregate contribution limits vary among 529 plans. For example, the aggregate contribution limits for California’s and Utah’s 529 plans are two of the highest at $529,000 and $500,000, respectively.6 After three one-time contributions of $150,000 over the course of 11 years, a 529 plan would be nearing California’s and Utah’s contribution limits, even though the value would likely be much higher due to investment returns. The 529 plan account would continue to grow even as the owner draws funds for the first child’s college education, granted at a lesser rate. After the first child graduates, the beneficiary can be changed to the second child, which means that a new aggregate contribution limit is set, and further contributions can be made. This cycle can continue for generations as the owner and beneficiary change to keep the 529 plan running.

Legacy Planning in Action

To illustrate how 529 plans can be used for legacy planning, let’s assume a young married couple, Anne and Bob, open a 529 plan account in anticipation of their first child that they hope to have in the near future. Using time as an ally, they list Anne as the owner and beneficiary of the account. Anne and Bob begin contributing $12,000 annually to the account. Four years later, their first child, Charlie, is born and they change the beneficiary from Anne to Charlie and continue contributing $12,000 each year. Thanks to Anne and Bob’s savvy planning, Charlie’s 529 plan now has a meaningful head start.

Four years later, Anne and Bob have their second child, Derek. Anne and Bob decide to keep just one 529 plan account and increase their annual contribution to $24,000 ($12,000 for each child). Anne and Bob are still each within the 2020 annual gift exclusion of $15,000 per beneficiary ($30,000 combined total), without having to use any of their gift tax exemption.Despite the 529 plan account being intended for both children, Anne and Bob can only contribute a combined $30,000 to the account each year since only one beneficiary can be listed per account. Fast forward to the future: Charlie has just graduated from college and Derek is about to begin his freshman year of college. As long as Anne and Bob change the beneficiary from Charlie to Derek before any 529 plan funds are used for Derek’s college expenses, the withdrawals will be tax- and penalty-free.

After Derek graduates, his brother Charlie is thinking of having a child of his own. Because there are still assets in the 529 plan, Anne changes the owner to Charlie and makes Charlie the beneficiary, which begins the legacy. Anne, Bob, and Charlie can all contribute to the plan and once Charlie’s first child is born, he can change the beneficiary to his child just like Anne did for him. This cycle can continue for decades and hopefully cover the education expenses of Anne and Bob’s grandchildren, great grandchildren, and beyond.

Considering the Risks of Long-Term Planning

While a 529 plan is an effective tool to assist family members across multiple generations with their education expenses, there are risks inherent in such long-term planning. For instance, Congress could pass legislation that taxes account owners after a beneficiary change or it could limit how many times a beneficiary can be changed.  Alternatively, attending public universities may end up being free, which means the plan assets would go unused if the beneficiary chose to attend a public school. There is also the risk that successor 529 account owners may act contrary to the account creator’s intent and use all of the 529 plan assets for their personal (noneducational) desires, although this risk can largely be mitigated through the creation of a trust with the help of an estate attorney.

Despite these risks, 529 plans are an attractive method for families to provide educational support across many generations. If you would like to learn more about using 529 plans as a means for legacy planning and whether one is appropriate for your situation, please contact a member of your Cerity Partners wealth management team.


1 U.S. Bureau of Labor Statistics, “Learn more, earn more: Education leads to higher wages, lower unemployment,” May 2020,

2 Please note that the state of California has not adopted this federal change under the TCJA. Using 529 plan funds for this purpose will result in California income tax and a 2.5% penalty on the earnings portion of the withdrawal.

3 It’s important to consult your CPA to understand all tax implications and potential penalties related to the use of 529 plan funds, especially as they relate to recently passed laws.

4 Kathryn Flynn, “How to Change the Beneficiary on Your 529 Plan,”, April 10, 2019,

5 Changing the owner, versus the beneficiary, is unlikely to result in any income and/or transfer (gift/GST) tax since the IRS has not provided direct guidance to date on such a change. It’s important to consult your estate planning attorney and CPA to understand any and all gift tax and GST implications that come with certain beneficiary changes.

6 Kathryn Flynn, “How to Change the Beneficiary on Your 529 Plan,”, April 10, 2019,

7 Similar to the GST, you can give up to $15,000 to someone in a year without having to file a gift tax return or use your lifetime gift/estate tax exemption of $11,580,000. The annual exclusion is per beneficiary, so you can give $15,000 to multiple people in the same year without having to file a gift tax return. The annual exclusion is also per person, so if you’re married, you and your partner can give a total of $30,000 per year to anyone you wish without using any of your gift/estate tax exemption ($23,160,000 for a married couple) or having to file a gift tax return.

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