529 Plans and Estate Planning: More Than Just a College Fund

Most people think of a 529 plan as a college savings account. That is true, but when used thoughtfully, it can also reduce your taxable estate, transfer wealth to the next generation, and even give a young adult a head start on retirement. Here is what Oregon families need to know.

The Basics

A 529 plan is a tax-advantaged savings account sponsored by states or educational institutions. One person (the account owner) controls the account and names a beneficiary who uses the funds. The owner keeps full authority over investments and distributions and can change the beneficiary to another qualifying family member at any time.

Key tax benefits:

• Earnings grow tax-deferred inside the account.
• Withdrawals for qualified expenses are tax-free at the federal level.
• No income limits on who can contribute.
• Oregon offers a refundable state tax credit (up to $380 for joint filers in 2026) for contributions to Oregon’s Embark plan.

Qualified expenses include college tuition, fees, books, room and board, and now up to $20,000 per year for K-12 tuition at public, private, or religious schools — doubled from the previous $10,000 limit.

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The Estate Planning Angle

Contributions to a 529 plan are treated as completed gifts, meaning they leave your estate immediately for tax purposes. In 2026, the annual gift tax exclusion is $19,000 per person per recipient. But 529 plans have a special feature called “superfunding”: you can contribute up to five years’ worth of gifts ($95,000 per person, $190,000 per married couple) in a single year and spread the gift for tax purposes over five years. The money is out of your estate right away, and you still keep full control of the account.

You can also redirect the account to any qualifying family member — siblings, children, stepchildren, first cousins, and more — without income tax or penalty. That makes 529 plans a genuine multigenerational tool, not just a fund for one child.

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The Roth IRA Rollover: Solving the Overfunding Problem

The biggest knock and question on 529 plans used to be: what if the money goes unused? The SECURE 2.0 Act largely solved that. Starting in 2024, unused 529 funds can be rolled into a Roth IRA owned by the beneficiary, tax-free and penalty-free, up to a $35,000 lifetime limit per beneficiary.

The main requirements:

• The 529 account must have been open at least 15 years.
• Contributions made in the last five years are not eligible.
• Annual rollovers are capped at the Roth IRA contribution limit ($7,500 in 2026).
• The beneficiary must own the receiving Roth IRA and have earned income equal to the rollover amount.

The practical result: a 529 opened early can fund education, then pivot to retirement savings if education funds go unused. The worry about overfunding is largely gone.

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Pitfalls to Know Before You Start

• Non-qualified withdrawals trigger income tax plus a 10% federal penalty on the earnings portion.
• You cannot use 529 funds tax-free and also claim the American Opportunity or Lifetime Learning credit for the same expenses.
• Changing the beneficiary may reset the 15-year Roth rollover clock. IRS guidance on this is still developing.
• If you superfund and pass away within the five-year window, a pro-rata share of the contribution comes back into your estate.
• Oregon’s tax credit only applies to the in-state Embark plan. Out-of-state plans get no Oregon benefit.
• Not all states conform to recent federal changes for K-12 expenses. A withdrawal that is tax-free federally may still be taxable in Oregon.

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A Tool in the Toolbox: Not the Whole Plan

A 529 plan can be a smart piece of an estate plan — especially for parents and grandparents who want to move money out of their estate while keeping control of it. But it works best alongside a complete plan: a will or trust, powers of attorney, beneficiary designations, and a strategy that accounts for your full financial picture.

If you are wondering whether a 529 fits your situation, or if you are ready to build a plan from the ground up, we are glad to help. Contact Tillson Law PC in Sandy, Oregon to schedule a conversation.

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This article is for general informational purposes only and does not constitute legal or tax advice. Tax rules are subject to change. Consult a qualified attorney and tax advisor for guidance specific to your situation.