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In this episode, host Toby Mathis sits down with 529 plan expert Chris Stack to explore the surprisingly versatile — and widely misunderstood — ways these accounts can be used far beyond traditional college savings. Chris explains how 529 plans primarily benefit account owners, not just future students, offering tax-free compounding growth, powerful estate planning advantages, and remarkable flexibility in how and for whom funds are used. They discuss how married couples can superfund a single account with up to $190,000 in one contribution, how beneficiaries can be changed to any family member without tax consequences, and how accounts can be structured to grow entirely outside your taxable estate.
Chris also covers the strategy of directing non-educational distributions to lower tax-bracket recipients to minimize taxes, rolling leftover 529 funds into a Roth IRA, bankruptcy creditor protection, and the wide range of qualifying expenses from K–12 through graduate school, trade schools, apprenticeship programs, and nearly 500 international institutions. Tune in to discover how 529 plans can be a powerful, flexible tool for wealth building, legacy planning, and tax strategy at every stage of life.
Highlights/Topics:
- 00:00 529 expert Chris Stack – most surprising ways people use 529s
- 02:10 How 529 plans work and their history
- 06:41 Gifting strategies and estate planning benefits
- 17:42 Taking money out for non-education expenses
- 23:05 Investment options costs and choosing a plan
- 29:46 Eligible expenses and qualifying institutions worldwide
- 31:41 Three groups who benefit most from 529s
- 40:43 Overcoming misconceptions and getting started
- Share this with business owners you know
Resources
Chris Stack – Saving for College: savingforcollege.com
Chris Stack Email: cstack@savingforcollege.com
IRS Form 709 – Gift Tax Return: irs.gov/forms-pubs/about-form-709
U.S. Department of Education – Eligible International Institutions: studentaid.gov/understand-aid/eligibility/requirements/international-schools
Would you like to learn more about protecting your assets and minimizing taxes? Schedule a free consultation here: https://aba.link/3c7g
Register for a Free upcoming workshop today if you want to protect your business and personal assets from snoopy lawyers and creditors. Save Your Seat: https://aba.link/14g1
Full Episode Transcript:
[00:00.00] Intro [00:11.94] Toby: Hey, guys, Toby Mathis here and today we’re going to be talking about a whole bunch of things that you didn’t realize you could do with 529 plans. That you actually can and how they’re used by successful people in order to achieve a bunch of objectives you probably did not realize existed. I brought in an expert, Chris Stack, first off, welcome, Chris. [00:30.82] Chris: Thank you. Thank you for having me, Toby. [00:33.68] Toby: Fantastic. And, Chris, this is the waters he swims in. This is what he does day in and day out. I just said there’s nobody better than somebody who, this is what they do to bring in and talk about these things. Chris, what are the most surprising ways people use 529 plans that most folks have no idea even exist? [00:53.88] Chris: Well, thank you for that question. It really goes to the heart of what we’d like to convey here today. I think the most surprising thing is people use it for themselves. What I mean by that is most people think of these 529s, the kids’ college savings account. Therefore, they’re for kids, is the inference. And they’re not. They’re for individual investors and the benefits of 529 accrue to those individuals as owners of the account. [01:27.40] The most surprising way is to look at these and say, “Wow, I can enjoy all these benefits and it helps me achieve my goals,” as opposed to being focused on a kid, whether it be a child or grandchild, nephew, niece, what have you. It really is surprising when someone says, “Yes, I’ve used those successfully because it reflects an understanding that the account owner benefits from participating in these type of accounts.” [02:04.04] Toby: A 529 plan, just as somebody has never heard of one, can you just give a two-second summary of what it is? [02:11.12] Chris: Yes. It’s named after the section of the Internal Revenue Code that Congress established in 1996. And Congress reacted to what states were doing. People often ask, “Why do states get involved with these programs?” They’re not involved with IRAs and other accounts. And the reason is, as I just said, Congress reacted. States were already in the business of providing programs to help people pay for future educational expenses. [02:40.78] Most of them at the time were prepaid tuition programs, where you would pay the current rate and the program would say, “We will take your funds and ensure that you have enough to pay at the state university five, 10, 15 years later,” whatever it is that corresponds with that young family member. They were originally enacted to protect the plans. The plans didn’t have to pay taxes to the IRS. Then since that time, there have been over a dozen legislative enhancements making these more attractive and providing more benefits to the participants. [03:19.48] Toby: I don’t get a tax deduction for putting money in a 529 plan, but the growth in it is going to be tax-free so long as it’s used for certain purposes. Is that accurate? [03:31.48] Chris: That’s accurate at the federal level, Toby. If you reside in the state with no income tax, that’s certainly true. But there are about 30 states that have income taxes that do provide various levels of state tax deductions for contributions. There are three states, New Mexico, South Carolina, West Virginia, that say every dollar you put in is subtracted from your state taxable income, whether it be $100 or $100,000 or $500,000. [03:59.92] Then you have states like Maine and Rhode Island that are $1,000. It varies tremendously state by state. But I would argue the primary benefit is, as you reference, it’s tax-free compounding, earning on your earnings instead of paying taxes on your earnings. [04:20.16] Toby: What do you have to use the money for? Let’s say that I put together a 529 plan and I live in a tax-free state, I just put it together. I have to gift it so I could put in $19,000 per recipient in 2026, something like that. I just put the money in there and then let it invest and grow. Then someday I have to use it for one of these purposes. [04:47.20] Chris: You touched on a few different things in your question there. What do I have to use it for? Again, it goes to the flexibility of 529s. First of all, you don’t have to use it at all. There’s never a requirement you take money out what you put in. Second of all, you don’t have to use it for education to benefit from participating in this. [05:06.56] It was designed for education, but as we just stated, we know our funds will grow free of annual taxation at the federal and if the state laws are applicable, state level. I don’t have to use it at all. I don’t have to use it for college for tax-free withdrawal. I can start taking tax-free withdrawals for private kindergarten tuition, going all the way and through graduate school. [05:30.44] When I open up an account, I put myself as owner, I identify a potential future student, and I put a third name on who gets this account when I pass away. I can change any of those three names any time I want without any tax-cost penalty or fee. But I can also change who I’m going to use it for to any family member, which includes in-laws and first cousins and adopted and foster children. [05:55.88] I have great flexibility broadside because I can use it for so many different family members that want to count and vertically as well, because I can go not only for kindergarten through graduate school, but hold it then for the next generation or transfer leftover monies to a Roth IRA that can be used 40 years hence. Of course, growing tax-deferred year after year to really build up some meaningful wealth. [06:27.82] Toby: There’s three parties. I’m the owner. Let’s say I set this up for my daughter. I think I can put what, five years of kind of go ahead and explain that one. [06:42.60] Chris: Well, there are many different attributes and benefits. One probably the most unique is it represents this, this account, this asset represents the only opportunity any of us ever have to own. Not only do we own, but we have daily access, liquidity and control over this account. And yet it is outside our taxable estate because you’re familiar, Toby, with the fundamentals of estate planning, quite simply, whatever you own when you die is inside your taxable estate. [07:14.00] You have to create lengths and all strategies to address this with the tension of giving up control and succeeding and removing it from our taxable estate. The 529 is a very simple solution because Congress provided, 1997, a year after they enacted 529, that when you fund the account, you’re making a gift to that designated beneficiary, that kid. Now, in that capacity, that kid never has any legal right claim access entitlement to the asset. [07:41.48] They don’t have an appellate distribution, yet the tax law says we’ve gifted it to them. So because it’s a gift, we’re subject to the gift tax rules. That’s currently $19,000 is the annual exclusion. To your point, 529 has a special provision that says, hey, we’ll let you use your 2026, $19,000. We’ll give you a four-year loan or advance on top of that for a total of five years. So five times 19 is 95. [08:08.64] And if I’m married and the tax code does not require you to be happily married, you can do twice that amount for $190,000 in one afternoon into one 529 account. But that’s not the end of it because most plans allow you to contribute until the net asset value reaches over half a million dollars. I’m able to use the other credit known as Unified Lifetime Gift Tax Exemption to supplement that. [08:37.74] If I want to put $500,000 in and I’ve used the five-year forward gifting for a total of $190,000, my spouse and I, I can put in $310,000 and I do that by carving out $155,000 and my spouse $155,000, which totals $310,000, together with the $190,000 is $500,000. I’ve reallocated to this tax-deferred investment account that is now growing outside my taxable estate that I have an auction, but no obligation to use free of taxation for education purposes for any family member starting kindergarten going through graduate school. [09:13.20] Toby: Let’s say I set this up for a family member. I guess this will be a two-part question. First question is, can I switch that person out and just choose a different family member? Does it have to be a family member? Then the other part is what happens when you die. There’s a different party that receives it? [09:33.32] Chris: The answer to the first question is when I set up the account, it could be any individual related or unrelated. It’s just that when I change it, it has to be to a family member of that person, not of me. If I, for some reason, decide I want to fund an account for the Starbucks barista, if I want to change the designated beneficiary whom she would be, it would have to be to a member of her family, not mine. [10:02.40] I don’t know everyone’s particular situation, but we’ll presume for this discussion they’re not related. I can change it daily without any tax-cost penalty or fee to another family member of the beneficiary. You had a second question. [10:19.80] Toby: When you pass, does it have to go then to that barista’s family or any of those designated beneficiaries, if somebody else could go to my living trust, could it go to a third party completely unrelated? [10:34.48] Chris: Three different names, three different identities, no requirement that any of them be related to each other. The third name, the transfer on death, we call it successor owner. Every other type of account we call beneficiary, but the tax code called the potential future student designated beneficiary. We use a different term called successor owner. [10:56.02] The account gets transferred without any tax-cost penalty or fee upon my death as owner to that successor owner. That successor owner can be a related person or not. It could be my living trust. It could be an LLC. It could be any entity with a tax ID number. And so whatever my estate planning, legacy planning may involve should be reflected in that decision who identify as the transfer of death on that account. [11:26.56] Toby: Let’s go over this real quick because some people may be going, wait, wait, wait a second. Are you telling me that I can make a gift? Let’s say I’m married and my spouse and I each make a gift. We could do $19,000 a year each. Whatever that is, $38,000 a year, we can turbocharge it and make it, what would that be $190,000? [11:48.72] And it’s after, no gift tax returns filed, no, nothing. It’s now in this vehicle, this 529 plan for somebody outside my family. It’s not included back in my estate. Then I can pick a different designee. If I brought it, if I made my living trust, for example, the beneficiary, if I passed and I never spent the money on education and it’s grown, like let’s just say that it’s doing what the stock market’s been doing the last 10 years and that 190,000 is now 700,000. [12:23.20] Would I be bringing it back into my estate for tax purposes if I made my living trust, the beneficiary, or could I just give it to a future generation and avoid having it included in my, we have these huge estate tax brackets now at 15,000 or 15 million single I think it’s 30 million right above and extra inflation, it’s going to keep getting bigger. But do I need to be worried about that, getting brought back into my estate if my intent is to get it out of my state? [12:53.92] Chris:No, you don’t need to worry about that. Terminology is very important again, beneficiary in 529 land means the potential future student doesn’t mean the third name who gets the asset when I pass. The successor owner could be my living trust. Upon my death, it then becomes my irrevocable trust. It’s never been in my estate. I’ve aborted the estate. [13:20.28] As you point out, the estate tax threshold is at a level that’s unprecedented. It’s extremely high, but that’s where we’re at currently. The estate tax is very resilient and despite pledges and intentions to eliminate it still remain standing. When the political pendulum swings the other way, and it will, it is a good candidate to be brought down to more widely applicable levels. [13:48.60] But should that happen, the 529 account retains its character. That would be excluded from that taxable estate. As it is for the dozen or so states that have their own estate tax, the state of Washington has no income tax, but it has a very aggressive estate tax, such as the state of Maryland as well. There are a number of states that you can benefit with one-stop shopping of 529, avoiding annual income taxation and avoiding the transfer estate tax. [14:20.92] Also want to point out another quirky thing about 529 is we’re talking about the owner passing and the asset moving to the designated person or entity. I don’t have to wait until I pass because I’m able to transfer ownership without any tax cost penalty or fee during my lifetime. [14:40.50] If that’s the case, now we see that not infrequently when a grandparent sets up an account that grandchild reaches the age of matriculation and they say to their financial advisor, for example, I don’t want to be involved in this exercise of paying tuition and figuring out when and how much is due. I transferred the account with that responsibility to my son, the grandparent’s parent. The answer is yes. [15:09.52] By simply executing a half a page form, you’ve succeeded in doing that again without any tax cost penalty or fee. But there may be other situations where that action is warranted. Flexibility is the rule, not the exception with these, which is counter to their pervasive way of thinking out there. [15:29.00] Toby: It’s really interesting, you just gave a good scenario. I was thinking we could go through a few scenarios so people really see how this works. But in this particular case, you said, hey, it’s the grandparents, they set it up and they want to make sure that, hey, it’s going to be for their grandkids, I assume, but they don’t want to be involved in the management of it or in the decision making. [15:50.88] They transfer the ownership of it to their children now, and I’m assuming that maybe the kids were the beneficiaries when they set it up or in your example, the grandkids. Either one, it doesn’t matter because we have ownership of the 529 plan and then the education beneficiary. I’m probably hatching that term. You have the successor owner. You’re transferring it to your child. Can they do anything they want with that money? Could they just take it, say, hey, you know what, I just want the money? [16:27.08] Chris: Yes, they could because they’re the owner. These accounts have daily access, equity, and control. If you’re putting $100 a month, people are not going to get too worked up about what happens to that account should I pass. If you’re going to fund an account, half a million dollars and it grows to a million or more over time, you do care, and that’s when you have to consider naming your trust as the transfer and death successor owner. and [16:54.16] Providing guidance to that trustee how you want these funds distributed under what conditions and so forth. You don’t want it to be subject to the discretion of the individual offspring that otherwise could be identified as owner of the account. Every situation is different and 529 provides the flexibility to accommodate those different situations. [17:19.24] Toby: If I set up a plan, then I can take the money out. I assume there’s penalties and tax. If I put $100,000 into a plan, me and my spouse for my daughter, let’s just say. Then one day I say, you know what, I really like that money. There’s $250,000 in it. I need to build an addition to the house and I pull that out. I assume there’s a tax consequence to a portion of it. [17:42.04] Chris: Well, these were designed for education and they’re tax-free when used for education or related purposes. But because I have complete control at all times, I can use it for anything I want and I am responsible for attributing the tax treatment. The program doesn’t do that. Going back to your original example, $100,000, let’s say in just half a dozen years or so ] I want to use these funds to help my daughter start a business or my son purchase, put it down payment on a condo. [18:15.12] That asset value at the time is $150,000. Now I want to take $30,000 and I direct the program to do it the next day that that distribution is executed. The following January, a 1099Q is distributed, reflecting the principal component and the earnings component that’s calculated by the program on a pro-rata basis. In our example, 100 through to 150, we took out 30.18:44.68] That 1099Q is going to say 20 was principal, which would be a tax-free return of our contribution and $10,000 for earnings. The $10,000 earnings is subject to an additional tax penalty of 10%. That would be $1,000. The 10,000 earnings also subject taxes at ordinary rates, given it’s a tax-deferred vehicle. At the rate of the recipient, well, I own this account and I’m a successful individual.
[19:10.36] I’m in a high tax bracket, but I know I’m going to use this to help my daughter start the business.I had the program send a check to her and she’s only out of school a year or two. She’s making a little over 50,000. She’s in the 12% bracket. She gets the check, she gets 1099Q, she gets the tax liability. So 12% times the 10,000 earnings would be 1,200. With that $1,000 penalty, it would be 2,200. [19:38.24] Two things happened in this scenario. One, I as the owner of the account, this 529 investment account, took $30,000 of my money from the account, did not use a penny for education. I transferred the liability to a lower bracket. I also transferred the liability away from me. Where I end up is $30,000 of my money came out of my 529, not a penny used for education. I paid zero in tax. [20:06.60] If that’s my worst case scenario, I could live with that. I’ll point out also that 10% additional tax penalty on the earnings is waived in the case of death, disability, or scholarship of the beneficiary. There are circumstances that allow me to avoid that penalty as well. [20:26.20] Toby: And you said scholarship. If they received a scholarship from the school and you’re just going to give them the money now to use for something else that they could avoid it? [20:34.16] Chris: Well, that’s one option. I can just keep it in my account without taking any action. I have always have options with 529. One important option that we have is to apply qualifying funds left over in the 529 to fund a Roth IRA for that designated beneficiary. An account that’s been around for 15 years, the money’s been in it for five. I can start using without any tax or penalty or income limits applicable to fund the Roth IRA of that designated beneficiary. [21:12.88] Toby: I’m sorry. Is there a limit to that? Is there a dollar limit of how much I can? [21:17.24] Chris: Yes.There’s an aggregate limit of $35,000 and it is a source to make the annual contribution, which for 20, 26 is $7,500 for those under 30, those under a 59. [21:33.16] Toby: In going back to your example, we gave $30,000 to a daughter and she paid tax on a portion. It was 10% penalty of $1,200 of the federal tax. But she got $30,000 for 2,200 bucks. You had it outside of your estate, but again, these things are growing tax in theory, I guess it’d be tax deferred, but that’s not a bad tax hit. I’m like, why aren’t people using this more often. [22:08.96] Chris: The other benefit if we have to mention is the fact that the federal bankruptcy code says if your funds have been invested two years or longer, it’s outside the reach of bankruptcy creditors. Sometimes a state law that governs these plans, a state that sets up the plan that that law governs the plan often provides for various measures of asset protection from creditors and garnishments and liens and so forth. [22:33.12] It is a great value, overlooked value, applicable to so many. Sometimes I joke it’s only applicable to people who are parents or grandparents who don’t like paying taxes and are going to die one day. [22:47.88] Toby: I got to say this, there’s got to be a catch, right? They don’t let you just invest it yourself in anything, are there limitations on what they can invest in? Are these things, are there lots of fees or costs associated with these or can I just very easily set one up and then do what I want inside it? [23:05.40] Chris: The states are the trustees and as such, they kind of like 401(k) trustees are responsible for overseeing these plans and set forth the menu of investment choices. Those menus have evolved tremendously over time. Originally they were just portfolios that simply move with the age of the designated beneficiary. [23:29.00] They are still available. That’s kind of off the shelf that many people participate in directly. Now there are menus of different asset classes of individual fund and ETF options to pick. If I wanted to dump all my money into technology, I could do that. All my money into emerging markets, I could do that or perhaps, real estate fund, I could do that. [23:55.56] In addition to the more traditional categories, large cap growth, large cap value international, so forth and so on. As well as stable value and FDIC insured options. I have more flexibility than I did in years past and because these are pools of money under control in the state, the state ensures that the cost is low. [24:18.26] When they first came out and had no assets, it was the administrative costs were quite burdensome to a low asset plan. We have about $550 billion in these plans nationally. They’ve reached the threshold where they are at a very attractive cost, sometimes as low as 13 basis points all in. You can find more expensive and better performing options, right? [24:46.16] You and I both know low cost doesn’t mean best net return. But it is, you are, I think it’s important to note operating in the universe of investment choices, investment choices have risk and rewards. These are not guaranteed savings unless you opt for a specific option that provides that. The one catch that I will point out in response to your question. And that’s it. [25:17.28] Toby: Different states have different kind of costs and different things. Like you could avail yourself to a low cost, low administrative cost state perhaps or do you have to stick into a particular state if you live there? [25:32.16] Chris: There’s the great majority of plans do not have residency requirements. If I want to invest in Hawaii’s plan or Georgia’s plan, I could do that. Nevada has a plan that’s distributed through Vanguard, but then the state of New York plan also uses Vanguard almost exclusively. That’s actually a lower cost than the Nevada plan, again, because it’s larger size. [25:58.10] It’s pretty much the same thing, but a lower cost. You want to be mindful, you do have plenty of choices, and then there are about 30 plans that are available through financial advisors. If you’re accustomed to having a financial advisor handling your investments, and this is an investment, they certainly have a number of good options to work with as well. [26:22.88] Often people get caught up in the state tax deduction that we touched on earlier in our discussion, and often that’s the tail wagging the dog. If I’m going to put a large lump sum to work, but my tax deduction is 5 or 10,000 like it is in New York, I don’t want that tail wagging the dog. I’m mindful of the savings that it can provide, but often a large principal contribution with better performance will make up for that tax deduction savings in one year. [26:52.38] If I’m going to invest for 5, 10, 15 years, or longer, especially given the Roth transfer, I need to put that in its proper perspective. I have lots of choices, a lot of options, and, you know, but I think participating in the worst plan is participating in none. [27:15.92] Toby: I kind of want to do two things here. I want to go over a few examples, but I also want to give your role in how you work on these things because you’re not a financial advisor. This isn’t something where you’re like, hey, come here, open up a 529 plan. This is, you’re an expert in 529 plans. Do you work with financial advisors or what role do you play when you work with? [27:34.96] Chris: Not directly. I work with plans and plan managers to educate the public and financial advisors on 529 plans. I don’t get paid on transactions. My principal objective is to distribute information like we’re doing right here, right now. I’m really not, you know, I’m somewhat indifferent, you know, as to which plans get used. [27:59.50] People always ask me, what’s the best plan? And I kiddingly, kiddingly will say, oh, whoever’s paying me to speak has the best plan. But you know, as I said earlier, participating in a plan, and you can transfer, you can roll over from one plan to another, certainly at the federal level without any tax cost penalty or fee. Most of the states say, well, if you’re going to leave our plan, give us back the tax deduction you took as a resident taxpayer. [28:26.36] Many folks, maybe that lived in Idaho and funded the Idaho plan, took a tax deduction, then moved to Nevada, no longer filing in Idaho. They can move to the Nevada plan if they thought that was more to their liking without tax consequence, inadvertently. There are all sorts of different considerations. [28:46.12] California will not allow you to use the 529 to pay for K through 12 tuition. I work with advisors and their clients and say, well, yeah, but there’s a grandparent in Arizona. If you transfer ownership without any tax cost penalty or fee, let them take the tax fee distribution and pay that K through 12 tuition tax fee. That’s the type of thing I do. [29:09.08] I work with people that take full advantage of 529 plans. I don’t understand why states denied what the federal government has made available, but that’s politics. I don’t want to get into that because I’m not qualified. [29:24.12] Toby: Well, you just casually put out a workaround that would save somebody quite a bit of money, especially in a state like California, where the taxes can be so high. What a huge difference. You just mentioned K through 12. You can use it K through 12 higher education, can you use it for trade schools and things like that? Or is there a restriction on what type of education? [29:46.28] Chris: It is so generous in the potential applications for tax free withdrawals. To be sure, the traditional bachelor programs are covered in state, out of state, doesn’t matter. There are nearly 500 institutions outside the United States that are identified by the US Department of Education as eligible institutions that I can use 529 tax free to attend. [30:10.88] That does not include the thousands more that I go through my own state university setting up a study abroad program for. I pay my own university for that, which is really the key when providing evidence of tax free distributions. There are vocational schools, trade schools recently added where apprenticeship programs are now credential programs. [30:35.34] If I wanted to get my CFA or CFP, I could cover those expenses tax free with my 529 accounts. Most expenses at most schools, tuition, room and board, books, supplies, fees, equipment required for attendance, laptops, printers, so forth and so on, the two major expenses not covered, transportation. [30:58.28] If I live in California and I’m going to college in Washington DC, the cost of getting back and forth, or if I live in San Diego and going to school in Sacramento, the cost of getting back and forth is not covered. The other major expense students complain about not being prepared for when they get to college is the cost of beer. [31:17.52] They find they’re spending a lot of money on beer and they just simply weren’t prepared for it. There’s no mention of beer in the tax code. They’re on their own for that. [31:28.04] Toby: Can you do this? I could ask you a million questions and scenarios, but could you give us like three basic scenarios of how people use these successfully? If somebody’s sitting out there listening, they go, Oh, I relate to that one. [31:43.52] Chris: I mean, you could break it down into three groups. You could say, well, the traditional, this is what Congress had in mind, the young families that are working hard and trying to provide for their children, open up an account, you know, because the primary benefit is tax-free compounding and three components of tax-free compounding are amount, rate of return and time. [32:04.64] Time might be the one we have the most control over. You want to start as early as possible and watch that grow, just like we have with our own individual retirement accounts benefiting from tax-free compounding. And of course, the young parents can also call on their grandparents to contribute to those accounts or others. [32:22.84] You see programs where instead of a birthday present being a toy, how about making a contribution to the 529 account? That’s valuable. Sometimes that’s, that’s kind of what the state tax deduction is geared for, to really provide more immediate benefit to those who are, you know, whose budgets might be tighter than others. [32:44.40] The next group would be more of advanced, you know, maybe we’re done paying the tuition. We were looking at our grandchildren and where our own retirement is set, it’s safe and secure. We’re thinking about our legacy and we say, we want to do this. We want to do this. Come here. I want to show you my 529 beneficiary that just walked into the room here. [33:10.08] So this is someone who’s interested in checking in. I’m going to finish talking to this man that’ll come see you, okay? I’ll be right there. There you have it. That was not, that was not planned. That there’s a real life beneficiary. Now, unfortunately, the flexibility that I enjoy as owner, it’s been curtailed. [33:34.32] He heard me go online or a recorded line and say that I would be handling that. That’s okay. That’s me, that’s the one I’m just talking about, the legacy, I, you know, what’s most important to me after my own retirement. [33:49.60] Toby: You can switch. I don’t mean to interrupt you, but you could switch. If you have a grandson and you could do that. Or if there’s a future generation, if that grandson grows up and has a grandson and you want to switch it to a great grandson. [34:07.18] Chris: That goes back to earlier comment about naming a trust as owner and providing, and that ties into the third group, the high net worth who have wealth that will survive multiple generations. That is capitalizing on the fact that there’s no required minimum distribution, no requirement, the accounts closed, having a trust as owner of this. [34:28.64] Those successful families are often subject to high tax rates or subject to an estate tax, even at the current levels. This provides relief from that. They’re used to more traditional planning exercises and vehicles and dismiss the 529 as the kids college savings account. They’re the ones missing out because the benefits really could be enjoyed by them. [34:54.52] But Congress is mindful that this is really for more traditional middle-class families. We don’t see enough usage. We’re about 16, 17 million accounts currently, but there’s a long way to go to get more participation. We have $1.7 trillion about standing student debt. As I mentioned earlier, over $500 billion and 529 assets. Until that gets flipped, I don’t expect to see any movement to tell the benefits and the applicability of 529s. [35:25.72] Toby: Let’s say that I set up a 529 plan and originally it was for a daughter. She didn’t need it or we didn’t use it all and it continued to grow. Could somebody else contribute to that same plan, by the way? Could somebody else donate? [35:40.52] Chris: Most definitely. [35:44.52] Toby: But I’m the plan owner..
[35:47.52] Chris: That’s not unlike me putting money in your checking account because I contribute to the plan. I may think that I’m doing it for the benefit of that young child, but the reality is the owner has full control. I think I’d rather open up my own account if I were going to make more than one contribution to ensure it’s used how I want. [36:08.16] Toby: What happens if something happens to a beneficiary? If a child passes and there’s money in a 529 and they were the beneficiary of the education component? [36:18.64] Chris: Well, I could change the beneficiary of the family member of that deceased. I could take a distribution. I have any number of options should that beneficiary pass, but go ahead. [36:34.44] Toby: If a living trust owns the 529 plan, if I ended up, you know, that was hey, when I pass it goes to my living trust and the living trust, then that trustee would be selecting the education beneficiary or beneficiaries of that plan in the future. Would there ever be a time when it has to spend the money or could it just continue to grow in there and it’s there for the education of those beneficiaries? But if the money is growing faster than it’s being spent, it would just continue to compound. [37:07.00] Chris: I mean, keep in mind that the requirement is that the account have a designated beneficiary identified. If the one were to pass, you’d have to put a new family member on there. Otherwise close the account because that’s what it’s designed for. In the case of the death of the beneficiary, the monies can be removed without penalty because that’s one of the penalty exceptions. [37:30.16] Toby: Oh, wow. Okay. There we go. But if I wanted to keep it in there, I could just name a future beneficiaries. Let’s say a beneficiary passed, but there’s, there’s other children or other grandchildren. Would I just switch the beneficiary to one of them? [37:44.84] Chris: You can do that. The owner’s account owner’s discretion at any point in time. [37:49.36] Toby: Is there any time limitation on these then? Could you just keep doing that? [37:53.00] Chris: As opposed by 529 of the tax law there are time limitations and sometimes opposed by state law, like the Commonwealth of Virginia has a statutory time limitation. You need to be mindful of that. But 529 of the Toronto revenue code does not. [38:09.04] Toby: Yeah, I was just thinking for folks that are very education heavy, like they’re, they’re setting up their trust and they want to create education opportunities for their future generations that perhaps the way to do it isn’t just in the living trust by itself, but in conjunction with the 529 plan. Is that something you see when there’s grandparents that are significant means and they have multiple grandchildren, maybe even some great grandchildren and other children where they set up plans for each one. [38:40.20] They can gift 19,000 per person, per grandma and grandpa. They’re, they’re doubling it up. When they set these up, they can do a five year prepay. They’re getting that turbo like you mentioned, but you could just be doing that for, let’s say you had 10 grandkids. You could be giving away in theory, what’s that 1.9 million in year one without having to file a tax form without it being included in your estate. [39:05.84] Chris: Well, you know, anytime you gift more than the annual exclusion, you are obligated to file a 709, but there is a box to simply check in the case of five-year forward gifting for 529 right on that 709. No taxes do, it’s just an informative return that you’re filing. The trust and that kind of situation you’ve outlined to trust would be an appropriate successor owner because you may not feel comfortable empowering an individual with control over those assets that have grown over time. [39:41.00] When you compare the trust owning the 529 with the trust owning other assets, it’s only going to take $16,000 in annual income for that trust to be pushed into the highest federal tax bracket, 37%, plus the 3.8% that investment income tax. If the trust is not ideally set up and subject to state income tax, it’s also going to find itself paying in the neighborhood of 50% of its annual earnings in income tax.The 529 avoids all that and side by side with other trust assets really looks quite attractive. [40:21.72] Toby: I was just thinking the same exact thing, I was like, that seems kind of an ingenious way if that’s one of your goals. If you’re one of those people out there that’s thinking, Hey, how do I create education for my family? This is something that should be part of that plan, it seems. Is there anything else that we’re missing as far as the secret use of the 529 plan that somebody should be aware of? [40:42.76] Chris: Well, I go back where I started. There’s a fundamental misunderstanding, misconception. People don’t want to fund a lot of money into their kids’ college savings accounts. They often ask, can I get the money back if I need it? When posed and that question is posed to me, I always say, no, no, you can’t get it back because before you canget it back, it has to leave you.
[41:10.04] The fundamental thinking about these is, is, is there, it’s what do you mean get it back? Do you ask that about your checking account? It just reflects a lack of awareness and understanding. I think once you get past that, then you’re comfortable and enjoying the benefits and recognizing that the benefits approved to the account owner, not to the kid, not to the designated beneficiary. [41:33.04] I now have the option with my 529 account to deal with that kid’s future education expense. If I choose, if it’s needed, I can afford to, and I want to, those are the three factors at that point in time. But I always know I’m going to start with more after years of tax-free compounding, and I’ll enjoy that benefit. I think the secret is getting to it and starting and overcoming this misconception. These are the kids’ college savings accounts and, you know, taking full advantage of what’s being offered. [42:12.64] Toby: You are in full control. You can change the beneficiaries. If you want the money, it never really left it’s for, for tax purposes, for gift tax purposes, you made a gift. But if you needed the money back, you could get the money back and continue to utilize it. Or more likely than not, you’re going to be using it for something else, for some of those beneficiaries or for somebody else. [42:37.40] In which case you could switch them to be the beneficiary and issue the money to them. Then any tax, tax consequences are borne by them at their tax rate, which should be significantly lower than yourself if you were, if you were making significant money and you were worried about that. Is that a fair statement? [42:54.04] Chris: I think that’s a pretty good summary. Yes. You don’t need your 529 to learn from this video. It’s an educational experience that hopefully people will act upon. [43:07.56] Toby: Well, Chris, I really appreciate it. What I’ll do is I will put your contact information if you, if you provide it in the show notes in case somebody does need to reach out. I don’t know if that’s appropriate or not, but I can put it in there in case there’s a financial planner or somebody out there working with clients that maybe they want to bring you in to speak. [43:26.56] If you want out there, if you’re listening to this, you can put some comments in. What I’ll do is I’ll have my team look and if I can get an answer from Chris, that’d be great. If not, I know you work with Gio, one of my financial advisors as well. She’s fantastic. I can always run those through her as well to make sure that if there’s questions out there, that we get people answers. Chris, I really appreciate you coming on and sharing. Is there anything else you want to hit on before we, before we say goodbye? [43:51.72] Chris: No, 529 has been around since 96. We’re still learning about them and, and I, I very comfortable saying they’re only going to get better. There are more enhancements in the works. When you look at how far they’ve come in the past, we’re hopeful that that trend will continue, but you can’t benefit unless you participate. I’ll close with that. [44:16.40] Toby: Well said. Thank you, sir. [44:18.40] Chris: Okay. Thank you very much. [44:25.32] Outro:
