June 6, 2022
When you fill out the enrollment application for a 529 plan you are asked to name a successor or contingent account owner. This is an important decision. If you were to die or become legally incapacitated, the successor account owner assumes all rights and responsibilities for the 529 account. The successor can be, but does not have to be, a spouse. (A very small number of 529 plans permit spouses to establish the account as joint owners.)
Pick a successor account owner who you can trust to fulfill your wishes.
For most 529 plans, the rights assumed by the successor include the right to request a refund of any or all account assets (subject to tax and penalty on the earnings). So, it’s easy to see why your decision should not be made lightly. Consider the unfortunate situation where the money you intended to be spent on your child’s or grandchild’s college education was instead used by your successor as the down payment on a West Palm Beach condo.
The successor account owner also has the right to change the beneficiary. A stepparent might use your 529 plan to fund his or her own children’s college education, as opposed to your own.
Also be sure you understand what happens if you die without a successor. Even if you name a successor on your enrollment form, it is possible that the individual you name will not be available to take on that role because of their own death, incapacity or simple refusal to accept the role. Read the program rules or call the 529 plan’s toll-free number to ask about its procedures. In many, but not all, 529 plans, the beneficiary (or the beneficiary’s guardian if the beneficiary is still a minor) is named the account owner by default.
Naming a successor account owner lets the 529 plan account transfer to the successor without having to go through probate, which can cause delays.
The choice of successor owner can affect the financial aid treatment of the 529 plan. If the successor is the student or spouse, it will be treated more favorably than if the successor is someone else.
You can name the successor owner when you open the account or at a later date. You can change the successor owner at any time. Talk to your lawyer about any concerns or questions you have in regard to naming a successor owner for your 529 account. If you do not like the idea of passing ownership along to another individual, you may wish to consider naming a trust as successor owner. You can control the future actions of the trustee through the terms of the trust, ensuring that the assets are used in the intended manner.
[Editor’s note: This article was originally published on November 19, 2006 and updated on March 27, 2008. Updated on October 13, 2020 by Mark Kantrowitz.]
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As an expert in financial planning and investment vehicles, I can confidently discuss the intricacies of the 529 plan enrollment process and the critical decision of selecting a successor or contingent account owner. This is a topic that requires careful consideration, and my expertise in the field allows me to shed light on various aspects to help individuals make informed decisions.
The article by Joseph Hurley, dated June 6, 2022, delves into the importance of naming a successor or contingent account owner when enrolling in a 529 plan—a tax-advantaged savings plan designed to encourage saving for future education costs. Let's break down the key concepts presented in the article:
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Successor or Contingent Account Owner:
- When filling out the enrollment application for a 529 plan, individuals are asked to designate a successor or contingent account owner.
- The successor assumes all rights and responsibilities for the 529 account in the event of the original account holder's death or legal incapacitation.
- The successor can be, but is not required to be, a spouse.
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Responsibilities of the Successor:
- The successor account owner holds the right to request a refund of any or all account assets, subject to tax and penalty on the earnings.
- The successor can also change the beneficiary, potentially impacting the use of funds for education.
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Importance of Choosing Wisely:
- The article emphasizes the importance of selecting a successor account owner whom the account holder can trust to fulfill their wishes.
- A poor choice may lead to the mismanagement of funds, such as diverting money intended for education to other purposes like a real estate investment.
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Impact on Financial Aid Treatment:
- The choice of successor owner can affect the financial aid treatment of the 529 plan.
- If the successor is the student or spouse, the plan is treated more favorably than if the successor is someone else.
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Default Naming of Beneficiary as Account Owner:
- In many 529 plans, if no successor is named, the beneficiary (or the beneficiary's guardian if a minor) becomes the account owner by default.
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Avoiding Probate Delays:
- Naming a successor account owner facilitates the smooth transfer of the 529 plan without going through probate, minimizing delays.
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Flexibility in Naming and Changing Successor Owners:
- The account holder has the flexibility to name a successor owner when opening the account or at a later date.
- Changes to the successor owner can be made at any time.
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Consideration of Trust as Successor Owner:
- If uncomfortable passing ownership to an individual, naming a trust as the successor owner is an option.
- This allows the account holder to control the trustee's future actions through the terms of the trust.
To enhance one's understanding of these concepts, consulting with a lawyer is recommended to address specific concerns or questions regarding the selection of a successor owner for a 529 account. Overall, the article provides valuable insights into the nuances of 529 plan management and underscores the need for careful planning to ensure the intended use of educational funds.
