From Trust Fund to 529: Why Rich Families Are Switching Up Their College Strategy
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College is getting insanely expensive, and if you're from a wealthy family, there's a good chance your parents (aka the grandparents) want to help with your kids' education.
But navigating family wealth conversations can be awkward.
In this episode, I'm breaking down everything you need to know about getting the grandparents involved in 529 college savings plans, including a tax strategy called forward funding that could be a game-changer for your family.
Plus, I'll tell you the number one mistake I see my high-net-worth clients make with 529 accounts (hint: more isn't always better!)
Whether you're expecting your first baby or your kids are getting ready to leave the nest, this episode will give you the roadmap you need to handle these conversations like a pro.
🗓️ Schedule a FREE call to talk about whatever money questions are on your mind.
Transcript:
Hey, I'm Katherine and welcome to a quarterly market recap with Heir Necessities.
Hey, I'm Katherine and welcome to Heir Necessities, the podcast that turns complex financial concepts into real talk for Gen X, Millennial, and Gen Z inheritors. I'm a certified financial planner, I'm an inheritor myself, and I'm the founder of Sunny Ranch Wealth, a fee-only investment advisory firm that's dedicated to meeting the needs of current and future inheritors. In each episode of this podcast, I break down a different topic related to generational wealth and inheritance.
Rising College Costs in 2025: Understanding the Financial Challenge
And on today's episode of the pod by popular demand, we are talking about grandparents and 529 funding for college. Let's dive into it. First, why this topic? College is insanely expensive. You probably know this. It costs like 70 to $80,000 right now for one year of private college education all in.
And if you have little kids, these costs have been growing by like four to 5% a year. So if you have toddlers like I do, you're looking out 15, 16 years and you're like, "My gosh, if this keeps up, I'm going to be paying hundreds of thousands of dollars for one year of college." Not for all four years, but for one year. And a lot of people think, "You know, this bubble is going to burst, like the state of higher education can't continue the way it has," and...
I agree with that, I think that's true. I'm hopeful that something will change in the next two decades before my kids go to college. But if you come from a wealthy family, you might have an attachment to your kids going to some of these higher-tier schools, these more elite institutions. And I think it's pretty safe to say that these schools are going to continue to be expensive. Not just your Ivy Leagues, but your sort of top-tier liberal arts institutions.
They can command a really high ticket price because they have the name and the reputation to go along with it. So what are you supposed to do? Again, if you grew up in a wealthy family, there's a pretty high chance that your parents may be interested in funding education for your grandkids. Education is generally a value that most people can agree on, even if you're politically divergent from your family, even if you have totally different views about money and what matters in life.
What is a 529 Account? Tax-Deferred Education Savings Explained
Generally, people can kind of come to an agreement that education is important, and we all know that most grandparents love to support their grandkids. But how are you actually supposed to do it? Before I dive into that, I want to take a quick pause to just explain what a 529 account actually is. So if you already know this, skip forward a minute, maybe 90 seconds, and then jump back in. So a 529 account is a tax-deferred education savings account. What does that mean?
How 529 Plans Work: Investment Growth and Tax Benefits
Basically, you can put money into a 529 account, it's invested in the market while it's in the 529 account, and then when it's time to make withdrawals to pay for higher education expenses, so like college tuition, room and board, books, a laptop for school, whatever, you can withdraw money from that 529 account tax-free, which is a huge benefit. Think of it like this: You have a kid, when your kid is born, you put $50,000 into their 529 account.
That money is invested in the stock market, it grows, and then you don't put any more money in. But when your kid's ready to go to college, you have this $200,000 529 account. It's grown quite a lot. It's quadrupled during that timeframe, okay?
And you can pull money out of it again to pay for tuition, room and board, school supplies, books, a laptop for school, any qualified education expense, which is a very broad category, and you don't pay any taxes on that withdrawal. Whereas if you had had that money in a taxable brokerage account, you started with $50,000 and it grew to $200,000, when you pulled money out of that, as much as 75% of what you pulled out could be taxable capital gain income. But with a 529 account, it's all tax-free. Think of it like a Roth IRA for college savings exclusively. And you can use 529s in some states to pay for K through 12 expenses, but that's a different level of complication that I'm not going to get into here.
Understanding 529 Plan Limitations and Penalties
Okay, so I've explained broad strokes what a 529 is. Now this question comes into play of like, why does it matter about grandparents funding college versus parents funding college? And let's talk about that a little bit more. So a lot of the common questions I get kind of center around talking to your parents about paying for your kids logistically, having to do it, like who should own the 529 account?
And then also how much to put in that account because a lot of people want enough money to pay for college, but they also recognize when you're funding these accounts a lot of times your kids are young and they might not decide to go to college or maybe they want to go to a state school. You don't want to have these accounts significantly overfunded because if you withdraw money from a 529 and it's not used to pay for qualified higher education expenses, then you're paying taxes on that withdrawal.
And there's a 10% additional penalty that you have to pay the IRS. So while they're great accounts for college funding, they are not good accounts for anything else.
How to Discuss College Funding with Grandparents: A Step-by-Step Guide
So let's start by talking about how to start this conversation with your parents about paying for your kids' college. Honestly, I think this is something that a lot of people are interested in discussing, and it's really not something that should be a hard conversation. It always depends on your relationship with your parents, but as I said, education is a really strongly held and often a closely shared value across generations. And it's as simple as saying to your parents, "Hey, we set up a 529 account for our kids." You can explain to them what a 529 account is if they don't know. If you're interested in contributing to their college education, you can put money into this account. It's as simple as that and then letting them decide where they want to go from there.
You're not asking them to make contributions, you're not interrogating them, you're just saying, "Hey, this account exists, there's tax benefits," parents love tax benefits, and if you want to pay for college, you can put money in here. It might also be helpful in the course of that conversation to tell them how much college costs now because your parents probably haven't thought about paying for college since you went to college. And so if you tell them like, "Hey, right now, a year of college costs almost $80,000 at a private school," they might be more interested in helping because they're going to have the same sticker shock that you do. It's like, "My God, well, if it costs that much now, right, what's it going to cost in 18 years when my grandkid is actually ready to go to school?"
Forward Funding 529 Plans: Maximizing Grandparent Contributions in 2025
So start these conversations gently and just be informative. We have this, if you're interested in contributing, here's how you can do it. It's really easy to do it online. And then if you want to talk to them, if you think your parents are interested in taking a more active role or if they've indicated that they're really interested in funding your kids, then what you can do is start to talk to them about the different ways that you can fund 529 accounts. 529 accounts have a unique provision that's called forward funding. So basically there's that annual IRS gift limit below which you don't have to report your gifts to the IRS. Right now in 2025, that's $19,000 a year. You are able to basically make five years worth of gifts at once into a 529 account for a single beneficiary.
So if your parents are married, they could give $38,000 to your kid in any year without having any gift tax consequences. But in a 529, they could put in five years worth of those $38,000 contributions all at once. And what that does is when your kid is young, it gets you a really strong, healthy balance in that 529 account that they can then grow over time.
529 Account Ownership: Parents vs. Grandparents
If your parents are interested in talking more specifically about building a plan together to fund education, then talking to them about that option, talking to them about kind of how you expect the cost of college to change over time is really useful because it gives them a sense of what college might actually cost when your kids are ready to go to college and then lets them figure out from there how much they want to give on an annual basis or a lump-sum basis depending on what their preference is.
Then the next question we get into is who should own those 529 accounts? A lot of times grandparents may want to own those accounts themselves to have that feeling of control. And there are reasons why that's not a great idea. The biggest reason that it's not a great idea has to do with financial aid and how income from a 529 plan is calculated on the FAFSA form.
I'll be honest, if you're listening to this and you are kind of at the level of wealth where my clients are at Sunny Ranch, that doesn't matter to you. Your kid is not going to be applying for getting financial aid when they go to college, most likely. But I still don't think that grandparents should own 529 accounts. And honestly, it's really just for logistical reasons. Yeah, okay, your grandparent owns a 529 account, then what happens when it comes time to pay for college?
Are they going to be involved in all of those decisions? Are they going to be responsible for buying books for your kids? A 529 is an active account that's intended to be used for the beneficiary. And if you have little kids, that account might be used in 15 years, right? They might not own it maybe in 15 years, they're in ill health, it's just a layer of complication that you really don't want to deal with.
How Much to Save in a 529 Plan: Avoiding Overfunding
And so I would strongly encourage any grandparents listening to this and also any parents to just explain that to your parents and explain that it just makes more sense logistically for parents to own that account. The next piece we're talking about is how much money to actually put in that account, which is a really, really tricky thing to know.
My client base would tend to overfund those accounts to put too much money into them. And I think it's good to err on the side of being a little bit conservative when you fund those accounts because while there are tax advantages to 529 plans, if you have money left over, it's not great because then that money's locked into a 529 plan. Yes, you can take it out, but you pay taxes and you pay a 10% penalty.
Alternative College Savings Strategies: UTMA Accounts and Other Options
You can transfer it to a beneficiary who's in the same sort of line of descent, but the purpose of that money was to pay for your kid. It wasn't like giving money to another kid. You know, this was money given to your child. And so depending on what your goal is, if you want to pay for four years of private school or four years of public college, what you want to do is kind of forecast out what that cost might be and then underfund that a little bit, knowing that there will still be assets available to you when it comes time to pay for college. A 529 plan is not the only place that you're going to put money that could be available to your kid to use for school. They could be in a UTMA account. It could just be in a brokerage account in their own name.
And so I think having a little bit less than the cost of college right now is probably the top, top place that you want to be at this moment in time. So like if you have younger kids, if you've got like a five-year-old who already has, you know, say it's 70 times four, like 250, $280,000 in their 529 account, that would be a good place to stop.
Planning 529 Contributions Based on Your Child's Age and Goals
I think for private college, if your kids are younger, you're not going to want to be much higher than the actual cost of college right now. And in fact, you might want to be a little bit lower kind of depending on where your kids are. Figuring out exactly how much money to put into a 529 plan is one of the trickier pieces of this. I have specialized software that kind of projects out education value. So if that's something that you're interested in exploring definitely, you can shoot me an email.
Send me a DM on Instagram. I'll put all that information in the show notes to kind of like figure out what that is and I've also been thinking about kind of creating calculators for this so if it's something you're interested in, please let me know but the biggest takeaways sort of overall that I hope you took from this podcast are understanding what a 529 plan is, a little bit of information and maybe just a vote of confidence like talk to your parents about this. This isn't like talking about what's going to happen when they die. It's not even asking for money for you. It's literally just informing them that there is this option for them to help if they want to help. And then you can kind of grow the conversation from there.
Future Topics and Resources
I'll also have a later episode on like what a UTMA account is. I know I just dropped that in here and didn't explain it at all but I'm about at time. So I hope this video was helpful. I've got all the information. I've got some other blog posts about this. Information about how to contact me, where you can watch other episodes, everything in the show notes.
And I will talk to you next time.
Let’s take the next step together
Understanding how to talk to your parents about college funding isn’t easy. Inheritors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you start these conversations and make a plan for your kid’s future education goals.
