Wealth Planning Insights
Grandparent-Owned 529 Plans
Peter Faust, CFP®, April 2026
A 529 plan is a popular savings vehicle that is used to save for future college expenses. It offers the benefit of tax-deferred growth and tax-free withdrawals for qualified education expenses. Typically, a parent owns the 529 plan for the benefit of their children. Less common are grandparent-owned 529 plans for the benefit of their grandchildren.
Increasingly, though, we are having conversations with grandparent-clients who are interested in setting funds aside for their grandchildren’s college. Changes over the past couple years have reduced the negative effects grandparent-owned 529 plans on financial aid, and scholarships.
Financial Aid
Federal financial aid includes grants, work-study, and loans. The Free Application for Federal Student Aid (FAFSA) form is completed annually and used by most public colleges to determine how much federal financial aid a student is eligible to receive. Many private colleges also require the College Board’s College Scholarship Service Profile (CSS Profile) for their own financial aid.
What Changed?
Previously, the grandparent-owned 529 plan assets were not reportable on FAFSA, but when distributions were made to the student to pay for college expenses, the distribution was counted as the child’s income, which consequently had the greatest negative impact on financial aid.
Under current federal rules, neither the account balance nor distributions from a grandparent-owned 529 plan are reportable on FAFSA. This is a big benefit for students who attend public colleges with the intention of using some form of financial assistance.
Things to Consider
If you have a grandchild who attends a private college that requires the CSS Profile, the grandparent-owned 529 plan—similar to parent-owned 529 plans—will be treated as an available resource, resulting in a reduction of the school’s own financial aid offer.
Grandparents keep full legal ownership and control of the grandparent-owned 529 plan, allowing them to decide when and how much to contribute, direct investments, choose withdrawal timing, and even change the beneficiary.
Contributions to a 529 plan can reduce the grandparent’s taxable estate since 529 plans are excluded from estate tax. Also, depending on the state a grandparent lives in, they may be eligible for state income tax benefits (e.g., tax credit or deduction) for contributions they make to their grandparent-owned 529 plan.
As owner of the 529 plan, the grandparent can take back the money by distributing it to themselves. However, the earnings portion on distributions—that are not used for qualified education expenses— is subject to ordinary income taxes plus a 10% penalty.
Saving for your grandchildren’s education can potentially give their parents the opportunity to focus more on saving for their own retirement and other financial goals. However, a natural concern is that parents could consciously or subconsciously dial back their own saving efforts.
Striking the Right Balance
Grandparent-owned 529 plans are one of the more tax-efficient and legacy oriented tools available. The key is treating them as a coordinated piece of a broader family wealth strategy rather than a standalone solution. That starts with conversations between grandparents and parents, setting clear expectations, transparency, and integration with the parents’ own educations savings efforts.
As always, reach out to your Tanglewood Wealth Advisor if you would like to discuss a grandparent-owned 529 plan to help save for your grandchildren’s education.