When it comes to saving for college, 529 plans are one of the most powerful tools available. They offer tax-deferred growth and tax-free withdrawals when used for qualified education expenses. But while these accounts are generally straightforward, things can get more complicated when a 529 plan is owned by a trust.

Let’s break down what happens when a trust, not an individual, is the account owner, and why that matters.

The Role of the Custodian in a 529 Plan

In a typical 529 account, the custodian (often a parent or grandparent) maintains full control over the account. This means they can:

Select and change the beneficiary (i.e., the student who will use the funds),
Decide how much money to contribute,
Determine when to withdraw funds and for what purposes.

Importantly, custodians usually do not owe fiduciary duties to the beneficiary. That means they can change the beneficiary to someone else (as long as the new beneficiary is a qualified family member) without the original beneficiary’s consent or any legal obligation to act in their best interest.

What Changes When a Trust Owns the 529 Plan?

The landscape shifts significantly when a trust owns a 529 account. Trusts are governed by state trust law, which imposes fiduciary duties on trustees. A fiduciary duty is the highest standard of care in law. Meaning, the trustee must act in the best interests of the trust’s beneficiaries and follow the terms of the trust document.

That means if a trust owns a 529 plan, the trustee cannot treat the account as freely as an individual custodian might. The trustee may be limited in their ability to:

Change the account’s beneficiary,
Use the funds in ways not aligned with the trust’s purpose,
Make discretionary decisions that don’t serve the trust’s named beneficiaries.

A Real-World Example: Alberhasky v. Alberhasky

The 2019 case Alberhasky v. Alberhasky (No. 18-0927, 2019 WL 2150810) illustrates this difference. In this case, the Iowa Court of Appeals addressed whether a trustee’s control over a 529 account held within a trust was subject to fiduciary obligations.

The court concluded that because the account was trust-owned, the trustee’s actions regarding the 529 plan were indeed subject to the fiduciary standards laid out in the state’s trust code. This meant the trustee couldn’t freely change the beneficiary or use the funds in a way that violated the trust’s terms or disadvantaged the intended beneficiaries.

What This Means for You

If you’re considering using a 529 plan as part of an estate or trust strategy, it’s essential to understand the legal implications:

For Individuals: You have broad discretion over the account, including beneficiary changes.
For Trusts: The trustee’s powers are limited by fiduciary duties and the trust’s terms. Decisions must align with the trust’s intent and beneficiaries’ interests.

Final Thoughts

529 plans are flexible and tax-advantaged, but ownership structure matters. When placed in a trust, a 529 plan becomes subject to an entirely different set of legal standards; ones that prioritize the long-term intentions and protections of the trust.

Before making a 529 plan part of your estate plan or placing one into a trust, consult an estate planning attorney to ensure your actions align with both your goals and the law.