My aunt hid the 529 plan my grandfather left me, and with graduation quickly approaching, I’m worried it might be too late to access the funds

A 529 plan is a tax-advantaged education savings plan that can be opened by anyone, subject to the rules in the state where it’s issued. However, it is typically opened by a parent or grandparent for a child or grandchild.

The money in the plan grows tax-deferred, and withdrawals, so long as they’re made for qualifying education expenses, are tax and penalty-free. Many states also offer tax deductions for contributions.

A beneficiary is not an owner

Olivia’s maternal grandfather died when she was a teenager, and it wasn’t until then that she learned of the 529 plan. The grandfather named Olivia’s aunt as the successor owner of the plan, since he was estranged from Olivia’s mother, and assumed this aunt would then pass ownership to Olivia when she became old enough to take possession of it.

If a successor isn’t named, then, depending on the state, the beneficiary could be named owner, the executor could be named owner, or a new owner could be decided through probate. Olivia was under 18 when her grandfather died, so if he’d named her successor, the plan might have required her parents to become the owner, which her grandfather didn’t want.

Olivia’s aunt was supposed to pass ownership to Olivia once she turned 18, but she didn’t do this and rebuffed any attempts by Olivia to get information on the fund. She didn’t even take withdrawals to help Patricia with school.

Because Olivia’s aunt is now the owner of the asset, she has the right to do what she wants with the funds, which means Olivia has limited recourse — even though she’s the named beneficiary.

Olivia ended up using her own savings and some scholarship money to pay for college. Now in her final year, with graduation on the horizon, her aunt had a change of heart. She approached Oliva and said her financial advisor was looking into transferring ownership of the 529 plan, which is permitted in some states and by some plans, but not all.

Where and when it’s allowed, transferring ownership is typically a simple process that involves filling out some forms. An advisor may not be needed for the transfer itself, but may be useful for counseling Olivia and her aunt on any tax implications, how to calculate withdrawals and what to do with the remaining balance of the late-arriving plan.

Student aid, catch-up expenses and leftover funds

While it’s no longer an issue for Olivia, if she were just about to start college and needed student aid, then it may have been a better option for her aunt to retain ownership — if, of course, she was cooperative.

Under new Free Application for Federal Student Aid (FAFSA) rules (1) effective from the 2024–25 school year, distributions from 529 plans owned by friends or relatives outside the immediate family — including aunts — no longer need to be reported as untaxed student income.

Conversely, if Olivia’s parents owned the plan, it would be considered a parental asset and assessed at a rate of up to 5.64%. And if Olivia owned the plan, up to 20% of its value would have been considered when determining eligibility for aid.

Now that Olivia will be receiving the plan soon, she needs to decide what to do with it.

The good news is that she’s still in the fall term of her final year. Withdrawals can be made tax and penalty-free to cover qualifying expenses in the same calendar year, so Olivia can catch up and claim expenses she incurred after Jan. 1 as well as expenses this term. Next year, she can claim her final qualifying expenses.

There’s also a potential downside. If Olivia qualifies for student aid, her new ownership of the 529 plan may change that or reduce the amount she gets. Whenever a student aid recipient experiences significant changes in income or assets, they must notify the school’s financial aid office of these changes.