For wealthy grandparents looking to reduce their taxable estate while funding their grandchildren's education, the 529 'superfunding' rule is arguably the most powerful tool available outside of complex irrevocable trusts.
The 5-Year Averaging Rule
The IRS allows you to make a lump-sum contribution to a 529 plan and treat it as if it were spread evenly over five years for gift tax purposes. In 2024, with the annual exclusion at $18,000, an individual can contribute $90,000 ($18,000 x 5) to a single beneficiary's 529 plan in one year without triggering gift taxes.
Best Practice
The Married Couple Advantage
A married couple can combine their exclusions to superfund $180,000 per grandchild in a single day, instantly removing that cash and all its future tax-free growth from their taxable estate.
The Catch: You Must Survive
If you superfund a 529 plan and die in year 3, the remaining two years of the 'averaged' gift ($36,000) are pulled back into your taxable estate. However, the first three years ($54,000) and all the growth remain outside your estate.