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Protecting grandchildren's 529 plans
I have approximately $150,000 for investment in 529 plans for three of my grandchildren, ages 3, 5 and 7. As I understand it, I will be the donor and can name myself as the custodian. However, since I am 80 years old, the funds will be in the custody of a successor custodian for most of the time. My question is: What is there to stop the successor custodian from withdrawing funds before the children reach their adulthood (and) to use them for her own purposes rather than for the children's higher education?
Your concern is valid. Upon your death, the successor account owner -- in your words, the successor "custodian" -- takes over. And just as you have the right to change the 529 account beneficiary, to decide when and for what purpose to take withdrawals during your lifetime, and even to take the money back for yourself, the named successor steps into these rights if you were to pass away with assets still remaining in your 529 accounts.
Tax penalties and moral obligations aside, there are ways for you to safeguard the ultimate use of the 529 plans for your grandchildren. One of these is to name the grandchild -- and not the parent or other individual -- as successor owner of his or her 529 account. The 529 plan administrator still will require that the minor's parent or legal guardian be named as custodian, but the advantage is the custodian now has a legal obligation to use the 529 account for the benefit of the named beneficiary and for that child only. When the child reaches adulthood, the custodianship terminates, and the account can be retitled in the child's direct name.
A disadvantage to this approach is that it removes the successor owner's flexibility to shift 529 assets between the three grandchildren or to future grandchildren based on their individual college funding needs. Another potential disadvantage is, upon reaching the age of adulthood, the child may decide to take the 529 funds and use them for noneducational purposes, even when doing so will give rise to taxes and a 10-percent penalty on any gains.
Alternatively, you could ask your attorney to help you put together a trust to hold the 529 assets. The trustee would have a duty under the terms of the trust to use the money in the way you intended. Naturally, there are legal and accounting costs in establishing and maintaining a trust. But with a large sum of money going into 529 plans for your grandchildren, the added expense may be justified. Just be sure you engage an attorney who is familiar with 529 plans and the special rules involving gift taxes and distributions.
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