As a financial advisor with over 20 years of “practice,” I believed that naming a successor owner on the original paperwork for a grandparent-funded 529 plan would set my client and their family (and me!) up for easy administration in the event of death or incapacitation.
So when my client was found to be incapable of managing her own affairs and was awarded a one-way ticket for a progressive assisted living facility, I picked up the phone and asked the 529 provider to make the change to the successor trustee.
I simply was not prepared for what I heard.
The provider’s customer service team told me that the compliance team needed to review the request and make a decision as to whether or not the family can effect a change based on the facts and circumstances provided.
What they were telling me seemed to contradict information I read on Savingforcollege.com, the 529 resource for financial advisors that espouses accepted practices related to the 529 plan space, which spells out in this question and answer: .
What happens to my 529 plan if I die or become incapacitated?
Your 529 account will not terminate; it will simply continue under a new account owner. When you establish a 529 account, the application will invite you to name a successor owner. We recommend that you make this designation, as it will allow ownership of the account to be transferred easily and automatically to your named successor. If you do not designate a successor, the new account owner may have to be decided through probate. Some 529 plans have rules of succession to determine the successor owner in the event you have not named someone.
You should realize that a successor owner assumes all the rights of the original owner, including the right to request a refund. You must have confidence that the person you name as successor will fulfill your desires for the use of the 529 account. If you have any concerns about this, speak with your attorney about the possibility of naming a trust as successor.
Providers and advisors don’t get too into the weeds on most of this stuff because – up to this point – it hasn’t been a big issue. Let’s just say this will come as a surprise to most financial advisors.
Believing that ownership of the account would be transferred easily and automatically to the successor named on the account opening paperwork, I was floored to find out it was neither easy nor automatic in the case of incapacitation.
If the client had died, we could have provided a death certificate and completed some paperwork to move the successor owner to owner and achieve what we had originally intended.
But in the case of incapacitation, seamlessly moving to the successor owner was not an option.
Here were our choices to effect the desired outcome:
1. The family could produce a court order – a legal document resulting from the determination of a judge – to confirm what the doctors had already concluded and create a power of attorney with gifting powers. (This is not at all standard in most trust documents; most POAs allow the designee to make investment decisions but do not assign gifting powers.) This meant the family would have to incur the cost of paying a lawyer to go to court and get onto a lengthy waitlist for the case to be heard due to the pandemic lockdown.
2. As the rep of record, I could continue to act on behalf of the owner and the family until which time my client passes, and we move through the process of promoting the successor owner.
For all the right reasons, it is difficult to change ownership of these accounts. As is the case with all ownership changes, there are protections in place to determine the “power of the pen.” It is a serious matter to allow another person to step in and assume responsibility for dollar amount, let alone more than $200,000. On the one hand, I’m grateful for those guardrails; on the other hand, I’m frustrated by the fact that I anticipated this eventuality but didn’t understand the nuances associated with incapacitation versus death.
It seemed counterintuitive to have anticipated this need and not be able to execute the owner’s wishes exactly when a reason for doing just that presented itself. I naively assumed that designating the successor owner up front would allow us to do what we needed to do, when we needed to do it.
It never occurred to me that incapacity would be handled differently than death on these 529 plans. And I never understood that standard power of attorney language rarely addresses gifting powers as opposed to investment decisions.
I followed up with a written letter to the 529 plan sponsor, in which I included information on the accounts and power of attorney status and attached documents from two physicians. I also requested an exception to the mandate for a court order to change ownership on the accounts, noting that the estate of the account owner couldn’t get a court date during COVID-19, it was unlikely that the estate would incur the expense of going to court, and that we had anticipated a change of ownership in these accounts, as evidenced by naming the account owner’s daughter (the mother of the account’s beneficiaries, my client’s granddaughter) as the successor of the state.
The 529 plan sponsor informed me that the two physician’s statements indicating my client was not capable of acting on her own behalf were not sufficient to change ownership on the accounts. The provider told me that the successor document I had submitted – the power of attorney assigning all decision making to my client’s daughter – did not specifically provide gifting powers that would enable the transfer of ownership to another party, including the successor owner.
The good news is I can still do what needs to be done for the family. I will continue to act on behalf of my client as rep of record; I will continue to take direction from the individual my client has assigned as her de facto decision maker. In so many ways, nothing has changed. And yet I remain disappointed – my clients rely on me to look around the bend and know what’s coming and, in this case, it turns out what I believed to be true wasn’t. But now I know.
The better news is, I will know how to do a better job of preparing families for these circumstances moving forward.
I am constantly humbled by our need to “learn by doing” and am thankful that each frustration or curve ball thrown at advisors allows us to serve the next client with more competence, more confidence and more caring.
Beth V. Walker is a wealth advisor with Carson Wealth Management and founder of Center for College Solutions, which is based in Colorado Springs, Colo. She can be reached at [email protected] or 719-522-2278.