For professionals in the Bay Area managing substantial wealth, 529 plans are often an underutilized component of a broader tax and estate planning strategy. Most people are familiar with the basic concept: contribute to a tax-advantaged account, let the funds grow, and apply them toward qualified education expenses. For families with significant assets, the more interesting questions involve how these accounts compare to other savings vehicles, how they interact with estate planning goals, and when a different structure might be worth considering. California residents face an added layer of complexity given that the state does not conform to several federal expansions of 529 plan rules, which makes these comparisons more consequential here than in many other states.

How Do Custodial Accounts Compare?

Custodial accounts, allowed under the Uniform Transfer to Minors Act (UTMA), offer a flexibility profile that 529 plans do not. Funds can be used for any purpose that benefits the child, not just qualified education expenses, which appeals to families uncertain about a child’s educational direction or who want to preserve broader optionality, such as paying for expenses like summer camps. There are no contribution limits and no early withdrawal penalties, making them relatively straightforward to fund. That flexibility comes with tradeoffs worth understanding, however. Investment income (e.g. dividends, ordinary interest income, capital gains, etc.) is subject to taxes but there is a small benefit in the form of the kiddie tax rules.  These rules mean that the first $1,350 of unearned investment income is tax free, the next $1,350 is taxed at the child’s marginal tax rate, and above $2,700 in 2026 is taxed at the parent’s marginal rate for children under 19, or full-time students under 24 who do not earn more than half of their own support.

Assets transferred into a custodial account belong irrevocably to the minor, and in California, control passes to the child between age 18 and 25 depending on how the account was established, at which point there is no requirement that the funds be used for education or any other specified purpose. One important consideration is that at the age of majority, which is most often at age 18 here in California, the account converts to an individual account giving the child full and complete control, including walking down to their local luxury car dealership and selecting a very nice (and fast) sports car.

Is a Trust or a 529 Plan More Appropriate?

Trusts can be structured to serve a broader range of purposes with customized restrictions on how and when funds are distributed, such as preventing the purchase of said sports car. Unlike a 529 plan, a trust is not limited to education-related expenses and can fund a wide range of needs, from living expenses and housing to passing assets to the next generation, with the ability to set specific conditions around distributions such as age thresholds or defined milestones. That said, trust earnings are generally subject to capital gains or income tax rather than growing tax-free, and setup and administrative costs are meaningfully higher. In practice, this means you will have the ongoing annual administrative burden and costs of filing a tax return for this trust, along with a less favorable trust taxation compared to individual tax brackets. For families where flexibility, control over distribution timing, and multigenerational planning are priorities, a trust or a combination of both vehicles may deserve a closer look.

When Does Superfunding a 529 Plan Make Sense?

Superfunding refers to an IRS provision that allows individuals to make a lump-sum contribution of up to five times the annual gift tax exclusion in a single year, treating it as though it were spread over five years for gift tax purposes. In 2026, that means up to $95,000 per individual or $190,000 for a married couple per beneficiary, without triggering gift taxes, provided no additional gifts are made to that beneficiary during the five-year window. For professionals who have experienced a liquidity event, received a large bonus, or are unwinding a concentrated stock position, superfunding may offer a way to move a meaningful sum out of a taxable estate while putting those dollars to work in a tax-advantaged structure. Whether it makes sense in each situation may depend on a number of factors, including:

• Whether sufficient liquidity exists beyond what is being contributed
• Whether there is a reasonable expectation the funds will ultimately be used for education
• Whether reducing taxable estate assets is a meaningful planning priority

It may be less compelling when liquidity is tight, when there is genuine uncertainty about the beneficiary’s educational path, or when those funds may be needed elsewhere.

Can 529 Plans Help Reduce Future Estate Tax Exposure?

One less-discussed characteristic of 529 plans is that contributions are treated as completed gifts for estate tax purposes, potentially removing those dollars from the contributor’s taxable estate while the account owner retains control, a combination that is relatively uncommon in estate planning. Following the One Big Beautiful Bill Act, the federal estate tax exemption is currently set at $15 million per individual ($30 million for married couples) in 2026, so the relevance of this feature will vary depending on where a family’s estate falls relative to those thresholds. One strategy to consider is intentionally overfunding a 529 plan to the extent allowed to accumulate assets that can be used for future generations (children, grandchildren, great grandchildren) with the explicit requirement to use for education. 529 plans can be partially or fully transferred to other family members as account beneficiaries (however, the rules can be complex and requires a thorough understanding of the limitations). This strategy provides both tax-free growth on these assets explicitly for education, along with moving assets outside of your estate. Incorporating 529 plans into a broader gifting strategy may complement other approaches such as annual gifting, charitable giving, and trust structures, though it is not a substitute for comprehensive estate planning. For a deeper look at how the 2026 exemption may affect your broader estate plan, read more here.

How Should You Think About These Strategies Together?

For professionals in the Bay Area navigating equity compensation, significant income, and growing estates, education funding is rarely just about paying for college. Whether that involves a superfunding strategy, weighing a 529 against a custodial account or trust, the right path depends on the specifics of a given financial situation. Not sure where to start when it comes to education planning and your broader tax strategy? Schedule an introductory meeting with us today.

Tony Blagrove, CFA, CFP
Founder, CEO
Direct: (650) 397.2395
Tony.Blagrove@TravekaWealth.com

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