With tuition and fees for private nonprofit higher education averaging more than US$38,000 a year, funding a child’s lifelong education has never been so daunting. But it’s arguably never been so vital, either: College grads earn 75% more, on average, than those with only a high school diploma, according to the Federal Reserve Bank of San Francisco.

That’s one reason “529” education-savings plans, which are typically marketed to middle-class families as a budgeting tool, can also be a boon for wealthy households. 

Doug Stokes, one of the owners of New Orleans-based Stokes Family Office, uses the strategy with his wealthy clients, and calls them “an under-discussed tactic from an estate perspective. They are one of the more powerful tools that high-net-worth and ultra-high-net-worth families can utilize, especially if they have a lot of kids and grandkids.”

529 plans allow an adult to set aside money for a beneficiary to use for education. Though the beneficiaries are usually children or grandchildren, they don’t need to be related to the account owner. The funds can be used for higher education, primary or secondary school. 529s are funded with after-tax dollars, which means that over time the investments grow tax-free. 

These plans are attractive for wealthy families because they provide a way for a parent or grandparent to transfer much more money to a child than they would be able to without incurring gift taxes, Stokes says.

Here’s how he suggests maxing out a 529. Each 529 can be funded with up to five years worth of tax “exclusions,” which is the amount the U.S. Internal Revenue Service allows before a gift becomes taxable. As of 2024, that’s US$36,000 for a couple. A pair of doting grandparents could establish a 529 for a new baby in the amount of US$180,000. 

In fact, there’s no limit on the number of US$180,000 gifts that can be made in a single year, so a couple that’s just embarking on a new financial plan or starting the process of shifting wealth to the next generation could theoretically establish a 529 plan for all existing grandchildren at once. 

The one caveat is that the adults cannot use the annual exclusions to give to those same grandchildren again until that five-year period is up. 

Another plus: 529s can be used to pay tuition directly. Beneficiaries who are already enrolled in school can also be gifted up to US$30,000 each per year. Combining the two approaches offers an effective tool for wealthy households to help younger generations.

There are some things to keep in mind with 529s, and Stokes recommends working with a wealth manager and lawyer to capture the most value from the strategy. Among them: If for some reason you fund a 529 plan but need to take the money back, the amount that has compounded from the original funds is taxable, and you’ll owe a 10% penalty. That’s very similar to withdrawing money from a 401(k) plan before retirement.