Many clients have the dual goals of ensuring enough resources for a comfortable retirement and leaving a lasting legacy to the generations that follow them. Advisors are often tasked with helping clients carefully balance these simultaneous goals. But even when the goals are accomplished, the advisor likely represents an administrative transferor of the inheritance in the inheritor’s eyes rather than someone who’s a vital shepherd of wealth from one generation to the next.

With the youngest baby boomers approaching retirement age, the “great wealth transfer” is likely upon us, with trillions in assets transferring from one generation to the next over the coming decades. So, engaging the next generation has become more critical than ever. It’s estimated that 90% of assets leave an advisor’s management at an intergenerational transfer. There could be a litany of reasons contributing to that shocking figure, but a significant contributor could be a lack of a relationship between the heir and the advisor. More specifically, the heir could lack trust that the advisor is the best person to manage their inheritance.

One reason a relationship between an advisor and their clients’ descendants fails to develop may relate to topics that prompt the interactions that form connections. The idea of a client’s legacy necessitates discussions about death and the management of inheritances—these conversations are difficult for clients to face and can prompt heavy emotions. Therefore, clients may be less likely to find it palatable to bring their children into a discussion related to those topics.

It’s important to note that there are many ways to benefit the next generation through planning that don’t necessarily delve deeply into uncomfortable subjects like death. There is one clear-cut way: the use of 529 plans.

529 plans are college savings accounts that offer a wide variety of benefits, including tax-deferred growth and tax-free withdrawals if used for qualified educational expenses.

529 plans also offer unique gift and estate tax advantages. Contributions to a 529 represent a completed gift by the contributor that qualifies for the estate tax annual exclusion. Furthermore, five years’ worth of annual exclusion gifts may be used up front through an election on the IRS Form 709.

Additionally, effective this year, individuals are even more incentivized to contribute to 529 plans. There is a new ability to roll over unused 529 plan funds to a Roth IRA for the beneficiary (with many exceptions and limitations).

A Prospecting Tool For Future Generations
Given their unique tax attributes that can help satisfy the educational needs of future generations and be used as an intergenerational transfer tool, advisors should mix 529s into most planning conversations. In turn, the advisor could use the opportunity to educate the younger generation named as beneficiaries of these accounts and develop relationships with them as the years progress.

In the ISS Market Intelligence 529 Distribution Analysis 2023 report, 596 advisors were asked, “Does selling 529s help you retain clients?” and 65% of advisors agreed. Additionally, the advisors were asked, “Is a 529 a multigenerational tool that supports client retention and acquisition?” and 78% agreed, confirming that 529s offer an opportunity to create value and build wealth.

When engaging a younger generation with 529s, it may not be as simple as establishing a 529 plan for a parent or grandparent and listing their children as beneficiaries. Instead, it could be setting up 529 plans for the children or grandchildren themselves. Many clients could have descendants who are in their early professional years or don’t have children. Often, these individuals wouldn’t represent a typical client because they lack available funds to invest.

Offering to assist the children in establishing and managing a 529 plan for their current or future children could kick-start a relationship that lasts until the child comes into possession of their parent’s wealth. This process would be akin to an estate planning attorney offering to create health care powers of attorney for clients’ children. It’s a way to provide value to the primary client and the next generation while representing a catalyst for a more substantive future relationship.

Advisors have the difficult task of maintaining relationships that provide essential financial planning services to clients and showing value to their family members so that the relationship can traverse generations. Advisors should be keen to leverage all available tools in the financial planning toolbox, and 529 plans represent one of the most flexible and widely applicable ways to accomplish this dual mission of indispensable service and business retention.

The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10% penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.

David Haughton, J.D., is a team lead and an advanced planning consultant at Commonwealth. Haughton provides estate, trust, charitable, education, business and social security planning support to Commonwealth’s affiliated advisors.