A Multi-Generation 529 Plan, also known as a Dynasty 529 Plan, is a way to leave an educational legacy for future generations with one or more 529 Plans. A Dynasty 529 plan can be set up by parents, grandparents, or other relatives.
The Dynasty 529 Plan allows wealthy parents to save more than they need for their children’s college education. The Dynasty 529 Plan benefits from years of tax-free growth before parents pay for college.
However, passing a 529 plan on to future generations can result in gift and generation-skip transfer taxes. A 529 plan can also affect your eligibility for financial assistance if needed.
Depending on the number of offspring and increasing college costs, the Dynasty 529 plan may not be sufficient to cover the college costs of all future generations.
Basics of the 529 Plan
A 529 plan is a special savings account used to save for education expenses. Contributions are made in after-tax dollars and earnings are accumulated on a tax-deductible basis.
Two-thirds of the states offer a state income tax credit or credit based on contributions to the state’s 529 plan.
Qualifying educational expense distributions are completely tax-free.
The earnings portion of a ineligible distribution is subject to income tax at the recipient’s tax rate, plus a 10% tax penalty and, in some cases, a state income tax deduction.
Covered costs include:
- University tuition and fees, books, fixtures and supplies, room and board (if enrolled for more than half a day), computer costs (including computer software and internet), and special needs expenses
- Student loan repayments for the beneficiary and the beneficiary’s siblings up to $10,000 per borrower (lifetime limit)
- Fees, books, supplies and equipment required to participate in certain apprenticeship programs
- Up to $10,000 annually in elementary and middle school tuition
- Annual Gift Tax Credit Rollover to ABLE Accounts for Special Needs Beneficiaries
- Rollover of beneficiary Roth IRAs up to $35,000 per beneficiary (lifetime limit) after 2024
Donations to the 529 Plan are exempt from gift tax up to certain limits.
Donation limits and superfunding
The 529 plan has no annual contribution cap.
Contributions are subject to a gift tax limit of $17,000 per year (2023) per donor, per beneficiary. The couple can double this amount, or he can donate $34,000.
The 529 plan offers a five-year gift tax average, also known as superfunding, and allows donors to donate up to five times their annual gift tax deductible. removed from the donor’s estate.
529 plans have total contribution limits that vary by state. The total contribution limit is per beneficiary and includes all 529 plans for beneficiaries in the same state.
Once your 529 Plan account balance reaches the limit, you will not be able to contribute any more, but the value of your 529 Plan will continue to increase. There is no limit to how large a 529 plan can grow.
- Current 2023 total contribution limits range from $235,000 in Georgia and Mississippi to $569,123 in New Hampshire.
- The average contribution limit for all 529 plans in the state is $467,115, with a median limit of $500,000.
Families can have 529 statewide
Families have 529 plans in multiple states that can be used to pay for college in any state. A state’s 529 plan total contribution limit does not take into account the amount saved by other states’ 529 plans.
If the family invested up to the cap in every state, the total giving could be as high as $23.3 million per beneficiary.
The 529 Plan has no age limit, unlike the Coverdell Education Savings Account. The Coverdell Education Savings Account must end contributions when the beneficiary reaches the age of 18. The account must be fully distributed by the time the beneficiary reaches her 30th birthday.
There are exceptions to this rule, such as when the beneficiary has special needs. Contributions to a 529 plan, by contrast, can be made regardless of the beneficiary’s age and need not be distributed.
Four Strategies of the 529 Plan Beyond Generations
There are several key ways to continue funding and growing the 529 Plan across multiple generations.
Most states do not have a total contribution limit for rollovers. So you can roll over an out-of-state 529 plan and another family member’s 529 plan to your child’s in-state 529 plan.
However, some states allow outbound rollover It is a non-qualified distribution and subject to state income tax.
See map below. These states include Alabama, Arkansas, Colorado, Georgia, Idaho, Illinois, Indiana, Iowa, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Rhode Island, Utah, Virginia, Washington DC, and Wisconsin.
See map below. These states do not treat outbound rollovers as ineligible distributions. Arizona, Connecticut, Kansas, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, North Dakota, Oregon, Pennsylvania, South Carolina, Vermont, West Virginia.
Beware of annual gift tax exemptions
The primary limitation on contributions to the 529 plan is the annual gift tax exemption. That’s $17,000 per donor, per beneficiary.
A couple donating to the Dynasty 529 Plan for 40 years totals $1.36 million. This does not include annual gift tax deduction increases, investment valuations, or distributions to pay for college expenses. If you’re willing to use some of the $12.92 million lifetime waiver (she’s $25.84 million for the couple), you can donate more.
It is best to prepay contributions using five-year gift tax averaging or a portion of the lifetime gift tax exemption. so that it can be done.
529 example of plan account growth
With an average annual return on investment of 4% for a 529 plan, it doubles in value every 18 years. With an average annual return on investment of 6% for a 529 plan, it doubles in value every 12 years. This can significantly increase your 529 plan balance.
Exponential growth in the number of children per generation, the inflation rate of initial funding and tuition fees, and the number of families paying for college may eventually exhaust all funding for multigenerational 529 plans there is.
The Dynasty 529 Plan generally experiences 20 years of growth before the next generation needs to pay for college fees.
Change of beneficiary
Account holders may change 529 plan beneficiaries to family members of previous beneficiaries at any time without restriction.
Account holders can also transfer funds from one 529 plan to a new beneficiary 529 plan. This includes partial as well as full transfers. Such rollovers are limited to one he per beneficiary in any 12-month period.
In addition to the beneficiary’s spouse, the beneficiary’s family includes:
- sons, daughters, stepchildren, adopted children, adopted children or descendants and their spouses
- brother, sister, brother-in-law or sister-in-law and their spouse
- father or mother or ancestor and their spouse
- stepfather or stepmother
- Niece, nephew and their spouse
- aunts, uncles and their spouses
- son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
- first cousin
Change account owner
Many states allow account owner changes. Some limit the change of account owner to the death, incapacity, or divorce of the current account owner. Others allow changing the account owner under any circumstances. Some 529 plans allow the account holder to designate a contingent account holder during account setup.
The new account holder does not have to be associated with the old account holder. There are no tax consequences of changing account ownership. No income tax, gift tax, or transfer tax will occur when you change the owner of your account.
Parents should choose a State 529 plan that allows for flexibility in changing account holders, as account holders on Dynasty 529 plans may change eventually.
What you need to know about gift tax
In 2023, there is an annual gift tax exemption of $17,000 per giver and per recipient. This gift tax credit is adjusted periodically for inflation. The couple can contribute twice this amount, or $34,000, if they donate together.
Lifetime exemption from gift and estate taxes is $12.92 million. For husband and wife, the combined lifetime deduction is her $25.84 million.
However, the lifetime exemption will be reduced by about half in 2026, returning to its post-2017 inflation-adjusted state of 2017 ($5.6 million) unless Congress acts.
Based on inflation as of January 2023, you get a lifetime exemption of $6.9 million. The 2026 lifetime exemption will be at least this amount. But based on inflation estimates over the next three years, it would most likely be around $7.8 million.
generational transfer tax
In addition to the gift tax, there is also a Generation Skip Transfer Tax (GSTT). A generation-skipping transfer tax applies when the new beneficiary is in a lower generation than the current beneficiary.
Transfers include changing 529 Plan beneficiaries and rolling over from one 529 Plan to another.
If the new beneficiary is at the same generational level as the current beneficiary, there is no gift or transfer tax impact. For example, if a beneficiary changes to a cousin of the current beneficiary (eg, from the account holder’s niece or nephew to the account holder’s child), no gift tax or generational transfer tax will occur.
After donating to a niece or nephew’s 529 plan, wait a few years before transferring funds to a child’s 529 plan or changing the beneficiary to a child to avoid tiered transaction concerns.
If the beneficiary is changed to someone more than a generation below the current beneficiary, it may be treated as a taxable gift. Similarly, a rollover to a 529 by a beneficiary one or more generations younger than the current 529 plan beneficiary may be treated as a taxable gift.
The IRS has not issued rules specifying whether this is treated as a taxable gift from the account holder or from an old beneficiary to a new beneficiary. but, Draft regulation from 1998 Clarified that the transfer is treated as a taxable gift.
How are generations defined?
People are often confused about what it means that the beneficiary is one or more generations younger than the current beneficiary. Children are one generation younger than their parents and two generations younger than their grandparents.
Generations are defined by the Internal Revenue Code of 1986 (26 USC 2651) as the number of generations between an ancestor and an individual who is a direct descendant of the ancestor.
- If the individual is not a direct descendant, the generation number is based on the individual’s date of birth.
- Children born within 12.5 years are considered to be of the same generation.
- A person born more than 12.5 years and within 37.5 years of another individual is considered one generation younger than the other individual.
- A new generation is born every 25 years.
A change of account owner is not considered a transfer and is not subject to gift and transfer taxes.
There is an annual transfer tax deduction that is the same as the gift tax annual deduction. The same applies to lifelong deductions.
Changing beneficiaries in a 529 plan is unlikely to result in the payment of general family gift or transfer taxes.
However, as the Dynasty 529 Plan grows in size, it may be subject to gift and transfer taxes, especially if the family is very wealthy or if the transfer is made upon the death of the current beneficiary.
possible risk
Although a change in the law on 529 plans is unlikely because the rules are rarely abused, multigenerational 529 plans carry several risks that could reduce their effectiveness.
Congress may change rules related to gift and transfer taxes, or annual and lifetime deductions, which could lead to large tax burdens.
State 529 plans may change their rules to not allow rollovers if you exceed your total contribution limit.