Estate Planning
Multigenerational wealth transfer through superfunding the 529 account.
Trusts pay significant tax on regular income. In 2026, rates rapidly reach 37% plus 3.8% federal net investment income tax if earnings are more than $16,000 per year. Interest in the 529 plan grows tax free for education and is disbursed without the 3.8% NIIT tax. Even a 10% penalized non-qualified withdrawal can be taxed significantly less if the wealthy high tax bracket owner first transfers the account ownership to a lower income child or grandchild. 529 accounts are considered outside a taxable estate (the 1997 Congress claimed 529 accounts were a completed “gift” to the beneficiary at the time of contribution).
The successor/ownership of the 529 account may also be transferred to a Living Trust (at death called an irrevocable trust) or LLC. The account is then administered by the Trustee, but still not included in estate figures.
A grandparent/owner may also consider transferring ownership without penalty while living to avoid administration responsibilities.
Nigel puts a portion of his wealth into his trust, but also superfunds his children’s and grandchildren’s 529 accounts. Taxes on the trust earnings are up to 40.8% federal plus 4.25% state. Taxes on the 529 accounts’ growth are $0 for any qualified expenses, over 45% difference!
Nigel transfers 529 account ownership to the grandchildren for their car down payments. Even for these non-qualified withdrawals, taxes on the earnings could be near 12% federal plus 4.25% state plus 10% penalty. This still represents nearly 19% difference from Nigel’s tax rate (45.05% vs 26.25% tax).
No statement or example on this site should be considered a specific recommendation for your personal situation. Investing and tax strategies each carry significant risks. Examples herein may not apply to your situation. Please consult your estate attorney, tax advisor, or financial advisor for personal advice.