A Word of Caution When it Comes to Gifting 529 Plans

A client came to me recently with a very unfortunate story.  Her Great Uncle, Bud, from NY, a single man with no children, had passed away a few months prior and, as is too often the case, he hadn’t properly updated his will before he died.  Like many, he procrastinated.  This unfortunate mistake resulted in everything being left to an ex-fiancée whom the man hadn’t seen in nearly a decade – his home, his investments, the entire estate – that which ultimately included, a 529 Plan which he’d set up for my client’s 6 year old son when the child was a baby.  You see, his Will was over 10 years old, had never been changed, even though he moved states, never married, and started to make gifts to his nieces, nephews and their children.  Moreover, not only did he leave everything to his ex-fiancée, he named her as his executor, and therefore totally in charge of all of his affairs and assets at his death.

You see, when Uncle Bud set up the 529 college education savings plan as a gift to his Great Grand-nephew, he named the great-grandnephew as the beneficiary.  However, what he didn’t do was to add one or both of the child’s parents’ names as the “participant” or “owner”.  You see, the “owner” or the “participant” actually controls the 529 account, even to the extent of changing who the beneficiary is.  Yes, the gift to the great-grandnephew could be changed and given to someone else.  So, when the uncle passed and my client called the provider of the 529 plan (Fidelity) to make sure it was protected, she was told that the 529 account was now considered a part of the deceased’s estate (now belonging to the ex-fiancée) and that because her name wasn’t listed as a owner or participant and because the 529 account was owned by a custodian (i.e., uniform gift or transfer to minor) or a trust, she would need the executor of the estate (also the ex-fiancée) to essentially “turn it over to her” in writing.

How could this be that a gift, so undeniably intended for the great-grandnephew, be taken away?  This is where 529s can be tricky in that they are gifts, but also not gifts.  The law allows for the owner of a 529 Plan to change or remove a beneficiary at any time.  As the executor of my great uncle’s estate, rather than do the honorable thing, the ex fiancée opted instead to remove the child’s name from the 529 plan and transfer it to someone else and/or cash it out.

My client might have gone to court to contest the ex-fiancée’s decision, but, in this case, the cost of doing so would have surpassed the value of the 529 account itself.  It’s really a shame, but this story underscores the importance of having your financial and estate planning documents thoroughly reviewed and cross-referenced.  Also, the beneficiaries and owners of your accounts must also be reviewed to make sure they are coordinated with your estate planning documents and your goals and objectives.

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