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Friday, September 30, 2022

What Grandparents Should Know About 529 Plan Impact on Taxes, Medicaid Eligibility

529 Plans that can help pay college expenses for a grandchild come with both advantages and disadvantages. When used strategically, these tax-advantaged plans can reduce gift and estate taxes as well as taxes on gains or withdrawals. Unfortunately, owning a 529 Plan could make you ineligible for Medicaid, including Florida Medicaid long-term care benefits.

Getting the optimal benefits from tax law and Medicaid regulations can be a fine balancing act. The rules can change, causing you to need to take actions to preserve your tax advantages, Medicaid eligibility and provide college funding for your grandchildren. A Florida estate planning attorney can explain what grandparents should know about 529 Plan impacts on taxes and Medicaid eligibility.

How 529 Plans Work

As long as the funds get used for qualifying educational expenses like tuition, fees, room, dining plans, books, supplies, and student loan payments, neither you nor the beneficiary of the 529 Plan will have to pay taxes on withdrawals or on gains the investments within the 529 Plan earned. Of course, with tax advantages come many rules, like the requirement that withdrawals and earnings cannot get used for non-educational costs.

Parents and grandparents who set up 529 Plans own and control the accounts. Creating and funding a 529 Plan could help to pay for the education of your grandkids and take your estate below the level that triggers federal estate taxes. Currently, you do not have to pay taxes on the first $16,000 (the 2022 gift tax exemption limit) that you contribute to a 529 Plan. 529 Plans also allow you to deposit multiple years’ worth of these annual exclusion amounts at once.

How a 529 Plan Could Make You Ineligible for Medicaid Benefits – and What to Do About It

You will want to plan well in advance if you expect to need Florida Medicaid to help pay for your nursing home expenses. Medicaid will “look back” at your financial transactions during the five years before you apply for Medicaid to see if you transferred assets improperly. The assets in a 529 Plan that you own will count as your assets, likely making you ineligible for Medicaid.

It is possible to transfer the 529 Plan account to an adult grandchild beneficiary or to the parents of the grandchild to avoid the problem of the account getting included in your countable assets for purposes of Medicaid eligibility. You will, however, have to transfer the account more than five years before filing your application for Medicaid.

A Recent Positive Development with 529 Plans

Students have had to report 529 Plans on their Free Applications for Federal Student Aid (FAFSA) forms in the past, but soon they will not have to do so. Contributions to 529 Plans can reduce a student’s eligibility for federal financial aid under the past and current FAFSA reporting rules.

Starting in the 2024-25 academic year, however, changes in the rules removed the 529 Plan contributions reporting requirement, so your financial support of your grandchild’s education will not prevent them from getting financial aid.

If you own a 529 Plan for the benefit of your grandchildren and you anticipate needing Medicaid benefits to help pay for long-term care at some point, you will want to work with a Florida estate planning attorney to make sure that the transactions happen in a sequence that does not cause problems for you or your family. Get in touch with our office today for a free consultation.


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The Law Office of Jeffrey A. Herzog, P.A. assists clients in Florida, including North Pinellas County, Palm Harbor, Trinity, West Pasco County, and the surrounding areas.



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