All contributions to 529 plans are considered present interest gifts. So, in general, the value of a 529 plan is included in the estate of the designated beneficiary.
There is an exception if you contribute a lump-sum amount to the account in a given year and make a special election to treat your contribution as if it were made evenly over a five-year period. If you make this election and then die before the five-year period is up, the portion of the contribution allocated to the years after your death will be included in your gross estate.
For example, let’s say you make a $50,000 contribution to a 529 plan in Year 1 and elect to treat the gift as if it were made evenly over five years. You die in Year 2. The result is that your Year 1 and Year 2 contributions — $20,000 ($10,000 each year) — are completed gifts to the beneficiary. The remaining $30,000 ($50,000 minus $20,000) is included in your gross estate.
Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds and protection from creditors.