Added burdens for trustee



Dear Joe, Grandparents who have established a 529 plan for three grandchildren have recently set up a living trust. The 529 plans have one grandparent as the owner and the other as the successor owner. Should the living trust be listed behind the successor owner as a contingency? -- Randy


Dear Randy,

While it's possible in most 529 plans to name a trust as successor owner, the grandparents should consider whether their reasons for doing so justify the added complexity.

In my experience, the best reason to name a trust as successor is to ensure that the grandparents' desires are carried out no matter what happens in the future. If an individual successor were named, that individual assumes full control and ownership of the 529 assets, including the right to distribute them for his or her own use regardless of the educational needs of the named beneficiary. A trustee, on the other hand, must act in accordance with the instructions contained in the trust instrument. If both grandparents were to die before the 529 plan is fully used, the balance left to the trust stays dedicated to the college expenses of the named beneficiary.

But making a trust the 529 owner places added burdens on the trustee to manage the account separately from other trust assets. There may be special legal and tax considerations when determining how best to use the 529 plan, particularly in trusts set up so that assets may be "sprinkled" among the trust beneficiaries. A 529 account can have only one beneficiary at a time.

Will the trustee feel comfortable in handling these added complexities, or will more money have to be spent on legal and tax help?

A more typical approach is for the grandparents to name the grandchild's parent as contingent or successor owner of the 529 accounts. Presumably, the parents will respect the wishes of the grandparents and use the 529 money to educate the child. If no successor is named, most 529 plans will establish the account beneficiary as the owner. If the beneficiary is a minor, the child's legal guardian handles the 529 account until the beneficiary reaches majority age. That may not be the worst result.

Living trusts are popular as a way to avoid probate expenses in an estate. In most states, a 529 plan avoids probate anyway, and will pass directly to the named successor owner.