Ollie W. Holmes writes:

- quote -

And well you should.

At least in the Florida state-run plan (florida529plans.com),
you name a "survivor" who becomes the owner on the death of
the original owner, and the plan continues. This appears
to make 529s a whole new estate-planning tool to avoid
probate.

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This snippet comes from a 529 education plan brochure:

"The Program will pay the proceeds of a Non-Qualified
Withdrawal and of withdrawals due to the death or qualified
disability of, or receipt of a qualified scholarship by a
Beneficiary only by check payable to the Account Owner, or,
as directed by the Account Owner, to the Beneficiary."

This was probably written by a lawyer. The language is very
confusing. It seems to say that on the death of a
beneficiary, I, the Account Owner, can make a 100%
Non-Qualified Withdrawal, paying the necessary State or
Federal taxes. What about penalties for early withdrawal?
Why should I have to pay a penalty for an untimely act?

Here is another confusing paragraph from the brochure:

"Death of the Beneficiary. If the Beneficiary dies, you may
select a new Beneficiary, withdraw all or a portion of the
Account balance, or authorize all or a portion of the
Account balance to be withdrawn and paid to the estate of
the Beneficiary. Withdrawals that are paid to the estate of
the Beneficiary will not be subject to the 10% Federal
Penalty, but earnings will be subject to any applicable
federal income tax at the recipient's tax rate."

Any time someone mentions the word "estate" to me, I
envision a whole can of worms popping open in front of me.
Doesn't it make a big difference if the deceased beneficiary
is under or over 18 years of age, i.e., whether they were of
legal age to make a will? It also seems unfair to have to
direct the money back to the estate to avoid paying a 10%
penalty.

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