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.]
