Generational Wealth Transfer Disguised as College Savings: Do not fear the overfunded 529 account

The goal of the average American family is to make sure that they are never in a financial bind. More than simply reaching financial independence, most families want to be able to make choices based on personal preference and not financial limitations. When considering how they want to pass that freedom on to their children, the most common goal is to provide funds for thegenerational-wealth-transfer-disguised-as-college-savings-do-not-fear-the-overfunded-529-accountir children to be able to attend college. Allowing, in this case, their child to make a collegiate decision based on personal preference and not financial constraints.



What many people do not consider is how college education savings can help their own financial planning goals, not just their children’s future. When planning for college savings, having an estate planning frame of reference can help you solve your future gifting goals in addition to education savings.


The most common strategy for collegiate savings is a state sponsored 529 account. These accounts allow you to contribute money which grow tax free, and can be distributed tax free when used for an accredited expense. Some states even allow for contributions to be tax deductible.


There are certain funding rules, revolving around contribution limits, but the simple strategy is to use general annual gifting limits as contribution limits. One caveat worth knowing, is that the IRS allows individuals to contribute up five years of future gifts in a single year (with some filing requirements when done). The rules allow you to stockpile a large amount of funds into a child’s 529 early in their life and allowing long term rates of return to do their thing.

A common objection to the use of 529 accounts is they can only be used for college funding without penalties for withdrawals. Overfunding an account before knowing what collegiate path a child will take, or what amount of funds they will need, can give a parent pause. To counter this concern there is another way to view this account as a gift to your children.


The best way to conceptualize a leftover 529 balance is to consider it as a gift to future grandchildren. Imagine being able to tell your children, new parents of your grandchildren, that you have the collegiate expenses covered. This allows parents to then focus on other goals, increasing their own net worth and helping you create a generational wealth plan for your children, grandchildren and so on.


The secondary beneficiary does not have to be your grandchild. It can be any family member defined as a qualifying family member and the beneficiary change cannot skip two generations. This event could result in a generational skipping tax if it does not abide by the annual exclusion rule.


529 plans can help your children with college expenses, but they can also serve the dual role of helping your linage increase family wealth over time. While you must stay within the lines of IRS rules, it is important to understand that an overfunded 529 account is far from a terrible thing.

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