Naming a successor to your 529 account (Script)


Dear Joe, I am the account owner of 529 plans for two grandchildren. I wish to make my daughter (their mother) the successor account owner. If I die before the funds have been used, who will become the owner of these assets with regard to the financial aid application (FAFSA)? -- Stanley Watch Video


Dear Stanley,

If you were to die, the successor named on your 529 account application becomes the account owner for all purposes, including the FAFSA financial aid application. So in your case your daughter will assume all ownership rights over the accounts, and will have to report the 529 plan accounts as parental assets on the financial aid application.

You may be thinking that’s bad news, because any assets owned in your name as a grandparent at the date the FAFSA is filed do not get reported.

However, the impact of having the account in your daughter’s name is actually fairly mild, since the child’s expected family contribution goes up by only 5.6% of the account value.

And in fact, financial aid eligibility may turn out even be better with a parent as account owner rather than grandparent as owner. That’s because the 529 money a grandparent uses to pay college expenses in the first year must be reported on the following year’s FAFSA as student income, and so on through later college years. A student’s income can dramatically impact aid eligibility.

That income adjustment does not happen when the 529 plan is owned by the parent. Having 5.6% of the account value included in expected family contribution can be a lot better than having 50% of last year’s distributions included.

You might even consider naming your grandchildren as successor owners. If they are still minors at your death, their parents as legal guardians would effectively control the accounts. The benefit with this set-up is that the 529 account for one grandchild would not impact the financial aid of the other grandchild, as it would if owned directly by the parent.

If the only reason you have the accounts in your name now, rather than in your daughter’s or grandchildren’s, is for financial aid, then you may even want to consider changing the account owner now, which most of the 529 plans allow you to do. However, if you like being in control of the 529 plan, you should certainly feel free to stay on as owner and take another look at the financial aid impact when your grandchildren get closer to college.