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529 College Savings Plans are special accounts used to save money for college and secondary education. Grandparents often establish a 529 account as soon as their grandchild is born with the hopes of regularly depositing funds during the child’s pre-college years. BUT BEWARE: The entire account may have to be spent down on the grandparent’s health care costs if not set up properly.
What are 529 College Savings Plans?
529 College Savings Plans are part of a qualified tuition savings program. The Internal Revenue Service (Section 529) allows for account owners and designated beneficiaries of these plans to qualify for federal tax benefits. The plans encourage saving for future college costs, such as tuition, mandatory fees, and room and board. While all 50 states and Washington D.C. sponsor at least one type of 529 Plan, the specifics of the plans vary between states.
New York 529 College Savings Plans can only have one owner; however, anyone can contribute to the account. Typically, the owner of the account is the child’s parent and the child is the designated beneficiary. A grandparent may also establish a 529 account as the owner and name the grandchild as the beneficiary. As you will see below however, this is not recommended.
Impact on Medicaid Benefits
In the event the owner of a 529 Plan requires long term health care and Medicaid benefits, the entire value of the 529 Plan will be considered that person's asset. That individual will need to cash in the plan, pay the 10% penalty for withdrawal for non-educational purposes, and spend down the money on the cost of their care.
Although the ownership of the 529 account can be transferred, the transfer of the account will be considered a gift for Medicaid purposes and result in a penalty period for institutional Medicaid benefits.
In this unfortunate situation, the grandchild will lose out on all the money saved for college and the grandparent will have to spend down the money or wait out a penalty period if a gift or transfer of the money is made. Either way, this lose-lose scenario could have been avoided with proper Elder Law planning.
Planning for future generations is important. However, understanding the effect this type of planning could have on your own future needs is crucial in ensuring you and your family are protected for years to come.
As always, contact us if you have any questions. Our Elder Law attorneys are always available to address your questions and concerns.
Call us at 631.390.5000 or click here.
