If you want to finance a child’s or grandchild’s education, you may want to consider establishing a 529 account. The new federal budget has changed various rules related to 529 plans that are intended to broaden their appeal. The changes go into effect in 2026.
You may set up an account directly with a 529 provider. Each state offers several 529 plans. Click here to find plans available in your state. You may also have your financial planner enroll you in a plan.
As we explain later on in this post, establishing a 529 account can have advantages as well as disadvantages with regard to your estate plan. Therefore, you should also discuss the issue with your estate planning/elder law attorney.
Basics
A 529 account is typically established by a parent or grandparent. It can be used to pay for expenses of both higher education and grades K-12. It is funded with after-tax dollars, but the funds in the account grow tax-free. You do not pay tax on withdrawals for qualifying educational expenses or on any gains in the account. Neither does the beneficiary. However, any withdrawals that are made for non-qualifying expenses are subject to income tax and a 10% penalty.
Changes Coming in 2026
- Career Training Now Considered A Qualifying Educational Expense: Most people who have set up 529 accounts have done so in anticipation of covering college expenses for a child. Now, under the new rules, the account may also be used to pay for educational expenses that do not end in a college degree, such as career credential training and on-the job training. Examples are tuition, licensing exam fees, supplies, and books needed for training. These programs must be listed under federal or state guidelines and be accredited by a valid credentialing institution.
- K-12 Contribution Cap Raised: A 529 account may also be used to pay for tuition for grades kindergarten through 12 in a public, private or religious school. The limit on distributions was $10,000 per year. Under the new law, the cap on distributions increases to $20,000.
Estate Planning Considerations
- Estate Tax Benefits: 529 accounts are useful even if you are not wealthy. However, they do offer special tax advantages if you are affluent. Putting money in a 529 can reduce the size of your estate, thereby allowing you to pass on more tax-free money to your heirs. Under the current tax law, an unmarried person may contribute as much as $19,000 (the current annual gift tax exclusion) to any 529 plan annually, without paying any gift tax, or reporting it, or using any of your lifetime gift and estate tax lifetime exemption. A married couple can double that amount. You may also front load the account with five years’ worth of tax exclusion.
- Medicaid Nursing Home Medicaid Benefits Compromised: On the negative side, the funds in your 529 account are considered to be your assets. If you ever apply for Medicaid benefits for long-term care, the funds will count against your eligibility. Moreover, withdrawals made to pay for your beneficiary’s qualified educational expenses made within five years prior to your application, will be considered an unreimbursed gift and also count against eligibility. One possible solution to this problem is to transfer ownership to the beneficiary if the beneficiary is 18 years old or older, or to the beneficiary’s parents regardless of the beneficiary’s age. Of course, if the transfer occurs within the five-year period prior to your applying for Medicaid, it will still be considered a gift and count against eligibility.
Our attorneys can advise you on how a 529 plan can impact your estate planning and/or Medicaid planning. Call 561-625-1100 to schedule an appointment.
