Good news if you are a grandparent who owns a 529 account, and for your account beneficiary: Beginning in the 2024-2025 school year, contributions you make to a 529 plan need not be reported on the student’s FAFSA application (Free Application for Federal Student Aid), and therefore will not count against the student’s eligibility for federal financial aid. Says Stuart Siegel, president of FAFSA Assist, a college financial aid service: “The fear that a grandparent helping their grandchild by using their own 529 plan would interfere with them getting financial aid…is gone now with the new rules.”
Brief Explanation of 529 Plans
A 529 plan is a tax-advantaged plan that can be used to pay for educational expenses, for both higher education and grades K-12. Legitimate expenses include tuition, supplies, room and board, books, etc. Since 2019, the funds may also be used for student loan payments. There is no tax on gains or withdrawals so long as the money is used for legitimate educational expenses.
Every state has its own 529 plans, but you are not limited to your own state’s plans. Each plan has its own investment options. You have complete control over the account, and can make withdrawals if you wish – although if the withdrawal is not for a legitimate educational expense, the earnings are taxed and you will incur a 10% penalty.
You can also change beneficiaries, so long as the new beneficiary is related to the originally chosen beneficiary. A 2019 ruling widens the net of possible beneficiaries to include a first cousin of the original beneficiary.
Estate Tax Advantages
The current unified estate and gift tax exemption is $12.6 million per person. This is the total amount you can give away, both during your lifetime as gifts, and at death, without those funds being subject to estate tax. However, in 2026, the unified estate and gift tax exemption will drop down to approximately $6 million per person.
If you have a taxable estate (or are likely to have one), setting up a 529 enables you to reduce the size of your estate and therefore put more tax-free money into the hands of your heirs. In 2022, you may contribute up to $16,000 (the annual gift tax exclusion) to a 529 Plan without paying tax. Moreover, there is a special feature that comes with a 529: you can load the account up front with 5 years’ worth of estate tax exclusions ($80,000).
Potential Disadvantage: Medicaid Eligibility Jeopardized
The funds in your 529 account are considered YOUR assets. You control them. Thus, the funds will be considered an asset by Medicaid and will count against your Medicaid eligibility if you ever apply for Florida Medicaid benefits for long-term care. Medicaid has a five-year look-back period for gifts. Moreover, the disbursements made for your beneficiary’s educational expenses could be considered a gift and also count against eligibility if disbursements are made within the look-back period.
One possible solution to this problem is to transfer ownership to the beneficiary if the beneficiary is 18 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.
Talk to The Karp Law Firm estate planning attorneys to explore how to best help your grandchild pay for his/her education and still protect your own Medicaid eligibility. Reach us at (561) 625-1100 or email klf@karplaw.com.
To explore the details of various 529 plans, talk to a financial advisor with experience with these plans. Call us and we can provide you with recommendations to advisors with this expertise.
