Picture this scenario…
You’ve worked hard, saved and managed to accumulate some wealth.
You’re not a robber baron by any means but you’re comfortable. Your siblings haven’t fared as well and you want to make sure that their children have the benefit of a solid higher education. With no children of your own, it seems the right thing to do.
So you set up 529 college education savings plans for your nieces and nephews, make them the beneficiaries, and mention everything in your will.
And life goes on…
You don’t give it another thought beyond making regular contributions. You move to another state. You divorce.
All the things that happen in the normal course of living.
You know you need to change the beneficiary of your estate and name another executor (both are still your former spouse) but you never really get around to it.
And then the unthinkable happens. You die unexpectedly, with no time to make those changes you sincerely intended to make.
This is where things can quickly fall apart for those nieces and nephews you so wanted to take care of.
To make sure your wishes are carried out exactly as you intended, take these steps now to protect those 529 college education savings plans:
1. Name One or Both of the Child’s Parents as Participant or Owner
If you name your niece or nephew as the “beneficiary” of the 529 plan as a gift, you must add one or both of the child’s parents as the Participant or Owner. This gives them actual control over the 529 account. They can even change the beneficiary. If the child’s parent is not listed as an owner or participant, the plan will be considered part of the estate (which would then belong to your former spouse in this instance). Your niece or nephew would need the executor (again, your former spouse) to essentially turn the plan over to them in writing. And the executor and beneficiary of your estate would be well within their legal rights to refuse. Is that a risk you really want to take?
2. Update Your Will
I know you’ve heard this at least a thousand times but I’ll say it again because it is critically important in situations like this. If you undergo any kind of lifestyle change (i.e., divorce, death of a spouse or child, become incapacitated, move to another state, etc.), take the time required to have your will updated. This kind of situation happens all the time. The former spouse, as both executor and beneficiary, controls the 529 college savings funds because of a failure to properly set up the funds. If you’re going to the trouble of setting up a 529 fund and make regular contributions to it, take the necessary steps to ensure that money is used for what you intended.
3. Don’t Leave Assets or Insurance Outright to Your Nieces or Nephews
If you leave either assets or insurance directly to your nieces or nephews and they are minors at the time of your death, their parents will have to go to court to be named as guardians to gain access to these assets. Needless to say, that just adds another layer of complexity and more expense to the process.
4. Don’t Let Your Siblings Leave Assets or Insurance to You for Your Nieces or Nephews
Sometimes parents are tempted to name their siblings as the recipient of life insurance funds to be used for their own minor children. Funds transferred that way become part of your taxable estate. To use it for your nieces and nephews, you will have to file gift tax returns and use up part of your lifetime gift exemption. Additionally, those funds cannot be protected from your creditors without significant impact on your own estate plans. If your siblings name you as a beneficiary, suggest strongly that they speak to a lawyer about setting up a trust to receive funds rather than you personally. They can always name you as their children’s trustee.
5. Have Your Estate Planning and Financial Documents Thoroughly Reviewed
When you update your will, make sure all your estate planning documents are reviewed, cross-referenced and do not contradict each other. Also, make sure that the person or persons you’ve named as beneficiaries and owners of your accounts are coordinated with your estate planning documents and that all your documentation supports your ultimate goals and objectives.
I can’t emphasize enough how important it is to have current estate planning documents. And this is especially true if you have 529 college education savings plans set aside for nieces, nephews, great-nieces or nephews, etc.
If you have started a 529 plan or would like to and would like an expert opinion on how a plan like this should be handled, call us to schedule your Family Wealth Planning Session today. We can identify what needs to be done to ensure that you have the appropriate language in the plan to make sure that the money goes exactly where you intended. Our Family Wealth Planning Session is normally $550, but this month I’ve made space for the next two people who mention this article to have a complete planning session with me at no charge. Call today and mention this article.