Ask the Experts: Can I open a 529 account for my future grandchild?

Ask the Experts: Can I open a 529 account for my future grandchild?

Yes, you can open a 529 account before the birth of a grandchild, but you have to do it in a roundabout way.

First, you need to know the two key players involved in any 529 account. One is the account owner, who controls when and to whom the money is paid out. The account owner is usually the person who establishes and puts money into the account. The other key person is the designated beneficiary, who will use the money to pay for college expenses. The account owner selects the beneficiary on the plan application.

Because the person you want to name as the beneficiary is not yet born, you’ll need to do two things. First, when you open the account, you’ll need to name a beneficiary who is a family member who will be related to your yet-to-be-born grandchild, such as your child or the new grandchild’s older sibling or cousin. Then, when the baby is born, you (the account owner) can change the beneficiary to your new grandchild.

Thanks to special contribution rules, you can contribute up to $60,000 to a 529 plan at one time and avoid federal gift tax by treating the gift as if it were made evenly over a five-year period (a set of grandparents can contribute a lump sum of $120,000). This is a great way for grandparents to reduce a large taxable estate while still being able to retain some control over their money.

However, make sure to carefully check the details of each 529 plan you’re considering. Some plans may restrict beneficiary designations to individuals under age 21. That may pose a problem if you want to name your adult son or daughter as the initial beneficiary. Also, some plans may require that the funds be spent within a certain period of time, such as within 10 years of when the original beneficiary would be expected to enter college.