In this episode of Absolute Trust Talk, managing attorney Kirsten Howe continues her estate planning misses mini-series by tackling custodial accounts and 529 education plans. While these accounts are incredibly popular for saving for children, most people don’t realize a critical legal distinction: you don’t actually own them. This misconception leads to a costly problem when account owners die without proper succession planning.
Kirsten shares real cases from her practice where families ended up in probate court—spending thousands of dollars in legal fees just to access money intended for their children’s education. The good news? This problem is completely avoidable with one simple form at your financial institution. Kirsten walks through exactly what you need to do for existing and new accounts, plus provides a bonus warning about donor-advised funds with similar risks.
Time-stamped Show Notes:
0:00 Introduction
1:10 What custodial accounts are and how they work—an adult manages money that legally belongs to a child
1:45 Age limits for custodial accounts in California: children can access the money at 18 or 25
2:15 Understanding 529 education accounts and why contributions are considered gifts
2:45 The common misconception clients have about 529 accounts: thinking the money is still theirs when, legally they’ve given it away
3:33 Where the trouble starts when a custodian or 529 owner dies without proper succession planning
4:15 The probate court reality: families need court intervention to fix these problems even without a full probate
5:00 The costly consequence of missing this planning step: spending thousands to access thousands
6:04 The simple solution is designating a successor owner for 529 accounts using forms from your financial institution
6:45 How to protect custodial accounts by designating alternate custodians
7:15 Action step for existing accounts: call your financial institution to verify you’ve designated successors
8:00 Donor-advised funds present similar succession planning challenges
8:21 Final reminder: talk to your financial advisor about donor-advised funds to ensure you’ve dotted all the I’s and crossed all the T’s
Transcript:
Hello and welcome to Absolute Trust Talk. I’m Kirsten Howe. I’m the managing attorney at Absolute Trust Counsel. I’m glad you’re here today.
Today I’m going to do another short episode in the mini-series I’ve been doing about estate planning misses. I’m talking about misunderstandings, mishaps, misconceptions, mistakes—things that we’ve seen our clients have to struggle with over the years. I just want to share some of what we’ve come to understand in order to help you perhaps avoid these kinds of mistakes.
Today we’re going to talk about a couple of very specific types of accounts that we see a lot on our clients’ homework. They’re common. I’m not going to tell you anything you’re probably unfamiliar with completely. They’re different from each other, but they do have one very important thing in common, and that is that even though our clients might put these accounts on their homework and sort of think of them as their accounts, they legally are not the owners of these accounts.
What I’m talking about are, first of all, custodial accounts, and secondly, 529 accounts. I’ll briefly describe each of them so everybody who’s listening, even if this is foreign to you, you’ll at least be able to follow the episode.
A custodial account is when an adult has money that belongs to a child—legally is the child’s—but a child is too young to open an account to hold that money. The adult opens an account called a custodial account. The adult is the custodian of the account, and the child is basically the beneficial owner of the account. Once the child turns 18 or possibly 25—in California, we can have custodial accounts that last until 25—once the child reaches that age, they are able to go and get the money. But in the meantime, the adult who is called a custodian is responsible for that account.
The other type of account is a 529 account. This is an education account, and it’s set up under federal law. Money that goes into a 529 account is considered to be a gift that is made by the person who transfers money into the account. When they set up the account, they designate a beneficiary, typically, again, a child, because the purpose of the money is to save, set aside money, grow money tax-free to pay for college—the typical use of a 529 account. But in the case of a 529 account, as I said, it’s a gift. The person transferring money into the account is giving up that money. It’s not theirs anymore, even though our clients do tend to think of the 529 accounts as their assets because it’s there and it’s going to help them pay for college when that time comes. But as a legal matter, the money doesn’t belong to them. They’ve given it away.
Where we get into trouble is when either the custodian of the custodial account or the designated owner—the person who set up the 529 account—dies, and something has to happen. What we would like is for everything to be planned out ahead of time so that the thing that happens is exactly what you wanted to happen, and it’s very easy.
We all know, I think if you’ve been listening to this podcast even for a couple of weeks, probate is to be avoided. Probate being the court process that we have to go through when a dead person owns property—that’s what most people think of when we use the word probate. But probate is also the name of the court that we have to go to. Attorneys like me who practice in the trust and estates area, that’s the court we go to when our clients have problems that we need a judge’s help to fix. Things that I just described for you—a 529 owner has died, or a custodian of a custodial account has died—I’ve had these accounts in my practice where we ended up, even though we didn’t have to do a probate, we still had to go to probate court to get a judge to help us fix the problem. The problem being that there was no—now that the custodial account owner has died—there’s no custodian of the account. How are we going to manage that account if there’s no custodian? And with the 529 account, same thing. There’s now no owner. How are we going to get that money out to pay for college when there’s no owner to send the money to the college?
We’ve got to go to court. We have to file a petition. It takes time. It takes money. You know, that’s the worst part. You’ve got to spend a few thousand dollars to get a few thousand dollars out of these accounts. Sometimes the 529 accounts are worth quite a bit, so it doesn’t feel so bad to spend a few thousand dollars to get that money. But still, it’s never fun when you have to tell a client, “Okay, we have to spend a bunch of money to deal with this problem.”
What do we do? How do we avoid this problem? When these accounts are set up, you can designate a successor. In a 529 account, you are the owner because you set it up, but you can designate a successor owner. They have a form for that. The financial institution where you set it up, whether it’s Fidelity or whoever, they have a form. You can tell them, “If something ever happens to me, this is the person who will take over this account and be the successor owner.” Same with the custodial account. If you are the custodian, when you set that account up, you can designate an alternate custodian just in case something happens to you.
Now, I’m going to say also, if you already have these accounts, it’s a really good idea to double-check and make sure you did those things. If you set up the account long ago and you just don’t remember, just check in. Call the financial institution or walk in there and ask, “Can you please check if I’ve designated a successor?” And you can designate it now. So much simpler, so much easier than having to have somebody like me go to court for you to fix that problem after you die.
I’m going to say similar to these two types of accounts, the 529 and the custodial, is what we call a donor-advised fund, and a lot of our clients have those. They present similar issues because, again, it’s money that the donor has given away but still has some interest in and still has some sort of control over. If the donor dies, we need to figure out what needs to happen. I’m working on one of those right now, and you know that once I solve it, I will tell you about it in a future episode. I don’t have the answers right now about this donor-advised fund, but I’m just giving you a heads up. If you have a donor-advised fund, talk to your financial advisor and make sure you’ve dotted all the I’s and crossed all the T’s there.
All right. I hope this has been helpful, and I very much appreciate you watching and listening. I look forward to connecting with you next time.
Resources Related to This Episode:
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your unique needs to build a secure future now effortlessly. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
- Absolute Trust Counsel would love to offer access to our Incapacity Planning resource page: https://AbsoluteTrustCounsel.com/Incapacity-Planning/. We’ve collected our top planning information all in one place so listeners can find videos, guidebooks, blog posts, and a host of information with tips and strategies on implementing, planning, and protecting themselves and their loved ones.
- We’re pleased to provide a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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