Naming successor of grandparent's 529 plans



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


Dear Stanley,
Were you to die, the successor account owner as shown on the records of the 529 plans assumes all rights and responsibilities over your 529 accounts. If you name your daughter as successor, those accounts will be included as parent assets on any federal financial aid applications, such as FAFSA, filed after your death by a dependent student (your grandchild).

Parent assets are assessed in the financial aid formula on an income-based, sliding scale. The maximum assessment rate on parent assets is 5.64 percent. As an example, two parent-owned 529 plans with a combined value of $10,000 as of the day the FAFSA is filed will increase the student's expected family contribution, or EFC, by no more than $564. (Higher EFC means lower prospects for need-based grants and subsidized loans).

Notice that all parent-owned 529 accounts are reported even when only one grandchild is applying for financial aid. That result may not seem entirely fair, but it is consistent with the account owner's ability to control the use of the 529 funds.

You can get around this particular problem by naming your grandchildren -- instead of your daughter -- as successor owners on their separate accounts. For FAFSA purposes, assets do not include 529 plans owned by a sibling.

If you follow that plan, your minor grandchildren would assume direct ownership of the 529 plans following your death. Your daughter could still act as custodian until the grandchildren reach legal age. However, she would be more restricted since each 529 account could benefit only the particular grandchild named as beneficiary. Your daughter would not be able to change beneficiaries or transfer the 529 funds to other family members.

You probably would not want to make your grandchildren the successor owners if it meant them reporting their accounts as student assets, which are assessed at a flat 20 percent rate on the FAFSA. Thankfully, Congress authorized a special rule for 529 plans and Coverdell Education Savings Accounts that treats these particular vehicles as parent assets even when owned by the student or by a custodian for the benefit of the student.

Some grandparents have made decisions to transfer ownership of their 529 accounts to their children or grandchildren while they are still very much alive. You might think this would hurt the grandchild's eligibility for financial aid because grandparent-owned accounts are not reported as assets on the FAFSA. However, distributions from grandparent-owned 529 accounts must be included in the student's base-year income on the FAFSA filed for the year following the distributions, and this could have a larger impact. Check with your 529 plan before requesting an ownership change as a few plans do not accept such requests.