Some critical parts of smart estate planning don’t involve the estate plan documents themselves, like wills, trusts and powers of attorney. For example, it’s crucial to designate beneficiaries on retirement and investment accounts as well as life insurance policies.
Opening a 529 account can help you save for a child’s or grandchild’s education while benefiting from its various tax advantages. The beneficiary of the account is designated when it’s opened (and can be changed so that the same account can be used for more than one child if they need the funds at different times). But what if the owner passes away before the child needs the funds?
These accounts allow the owner (and there typically can only be one) to designate a successor (sometimes referred to as a successor owner or successor participant). Some even allow a contingent successor to be listed.
The successor is the person who takes over responsibility for the 529 account if the owner dies before the beneficiary reaches adulthood. It seems only prudent to name a successor when opening the account. However, according to a leading provider of 529 accounts, Ascensus, a full quarter of these accounts have no successor listed.
This is important for parents – no matter how young they might be – as well as for grandparents. (These accounts offer even greater tax advantages for grandparents than for parents.)
What happens if the owner dies and there’s no designated successor?
What happens to the account depends in part on the account administrator’s rules. It’s possible the account could end up in probate, which can slow down the estate administration process. Moreover, if the account is stuck in probate for a time, the funds may not be available when they’re needed (for example, if the beginning of college coincides with a parent’s or grandparent’s death).
It’s very simple to avoid this complication. All people need to do is designate a successor (and a contingent successor, if that option is available). It can be any trusted adult and can be changed if needed while the owner is alive.
If you or your spouse established a 529 account for your child or if any of their grandparents did, it’s essential to ensure that all of these accounts have a valid successor. Listing it in your estate plan is not enough. To learn more about this and other valuable estate planning tools, it’s smart to get experienced legal guidance.