Life Events Build trust across generations with a focus on education

If you play a passive role in your clients’ education savings journey because you view 529 education savings plans as small accounts, a hassle to set up or an unprofitable line of business, you may want to reconsider. The benefits of helping clients with educational planning go beyond assets under management. These conversations can help you build an emotional bond for a lifetime and may offer an opportunity to become a trusted financial professional for future generations.

There is a neural mechanism in the human brain that tags information with emotional associations that enhance memory.¹ The birth of a child is among the most significant, life-changing events your clients will experience. The subsequent chapters of raising and educating children, then sending them off into the world, are important milestones. For financial professionals, this is a golden opportunity to form a positive emotional association with clients as you discuss investing in the education they’ll need to launch their children to the next stage of life.

Most importantly for financial professionals, a child represents a good reason to review many factors that can shape clients’ financial futures, including setting up a will, revising the family budget, and creating nest eggs for their children, whether in the form of trusts or 529 accounts. This is also a time when other members of the family may wish to financially contribute to children and play a greater role in investing in their future, including when it comes to education. 

The link between trust and 529 advice

In his influential book “The Trusted Advisor,” David H. Maister discusses three core skills of trusted advisors: earning trust, giving advice and building relationships. Giving clients crucial advice about this incredibly important relationship in their lives not only builds trust, but also establishes you as an indispensable ally in financial decisions that will have consequences for both your client and their children for decades to come.

Indeed, for most parents, the advice is not only welcome but needed. Parents will spend roughly a quarter of a million dollars to raise a child from birth through age 18,² and on average an additional $112,000 for a four-year in-state school³ (even more for private institutions). This may be a daunting figure for a new parent to digest.

Furthermore, adults typically experience the greatest higher education expenses in their 40s.⁴ If not sufficiently prepared, this midlife expense could cause an unwanted break in the momentum of their retirement savings plan.

But these overwhelming challenges provide the opportunity for you to present your client with a solution in the form of 529 plans. No matter the net worth of your client, reminding them of the power of investment compounding as well as the tax-advantaged treatment that applies to savings used for qualified education expenses (state tax treatment varies), 529s can provide a great relationship-building exercise.

George Bates, an advisor at Bates Securities in Rockford, Illinois, explains, “If you are trying to help people plan for their future, the whole gamut is relevant. They’ve got to take advantage of every chance, every opportunity, every tax savings advice, every growth advice that they can get. To me, 529 plans are a topic of conversation in virtually every one of my clients’ lives if they have children or grandchildren.”

Navigating 529 choices

Navigating through the numerous 529 offerings available today can be challenging. Even with a relatively short investment horizon, the 529 plan and investment choice matters, especially given the limit of two investment strategy changes per year.

Over the past decade, assets in 529 plans doubled, and the number of offerings increased, bringing more complexity around fees, administration and suitability to the client.⁵ Additionally, our research shows that an effective active investment choice can help save a full extra year's worth of tuition over a passive one. State plans and tax benefits vary.  Deferring your client to their state plan without helping them evaluate all their options could present alpha risk.

Additionally, 529 plans offer a limited selection of investment options which differ by plan.  Many states also offer state residents state income tax deductions or credits based on contributions to the state’s 529 plan.  However, even if you and your client find the state’s plan to be acceptable and want to leverage potential state tax benefits, keep in mind that many states cap the tax benefits at a designated level of contribution. ⁶ Given the spectrum of investment choices, benefits and restrictions various plans offer your client, your guidance is critical.  In some cases, diversifying across more than one plan might be the most suitable choice to your client's situation.

Leverage the flexibility

Relative to the degree of benefit they provide, 529s are simple and easier to set up than other planning techniques, such as trusts. Time to set up is well spent and pays dividends in relationship alpha, how you stand apart in the eyes of your client. 

The money in a 529 savings plan isn’t limited to four-year universities. Community colleges, seminaries, or trade schools or certain apprenticeship programs … any path the beneficiary chooses that involves professional training at an accredited institution could be eligible for tax-advantaged treatment in a 529 savings plan.   Qualified expenses also include expenses for fees, books, supplies and equipment required for the participation of a designated beneficiary in certain apprenticeship programs. And thanks to recent legislative changes, 529 accounts can now be used to cover a wider array of qualified educational expenses, including certain postsecondary credentialing program expenses and expenses in connection with enrollment or attendance at an elementary or secondary public, private or religious school (kindergarten through 12th grade) beyond just tuition. Qualified K-12 expenses include (but are not limited to) tuition, curriculum materials, textbooks, instructional materials and online education materials up to a maximum of $20,000 incurred during the taxable year per beneficiary.  If withdrawals are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.

Wealthy individuals can help fund primary, secondary and higher education for multiple generations of grandchildren, nieces, nephews and godchildren by investing early, front-loading 529 accounts and leveraging up to five years of lifetime gift exemptions. Tax benefits allow you to contribute up to $19,000 in 2026 ($38,000 for married couples) to each individual annually without gift-tax consequences. Under a special election, you can invest up to $95,000 ($190,000 for married couples) at one time by accelerating five years’ worth of investments. Additional gifts made to that beneficiary over the next four years after the year in which the one-time gift is made may reduce the donor’s lifetime gift and estate tax exemption. If the donor of an accelerated gift dies within the five-year period, a portion of the transferred amount will be included in the donor’s estate for tax purposes. Clients should consult with a tax advisor regarding their specific situation.

There are also several potential use cases to employ. These accounts can be invested far beyond a 20-year horizon, to fund graduate school, seed a Roth individual retirement account or transfer the balance to another eligible beneficiary. And don't forget the tax savings can be significant!

Make a next-gen connection

As wealth shifts, it falls into more hands, in many cases those of female clients. For a new mother, the birth of a child presents the opportunity to make important financial decisions that will affect her family for years to come. According to Cerulli's U.S. High-Net-Worth and Ultra-High-Net-Worth Markets Report from December 2024, American women are projected to control most of the $54 trillion of inherited financial assets from baby boomers by 2048. Engaging female investors by showing you understand their motivations is important, so capitalize on this skill. In many cases, you’re helping them “change their family tree” by adding a 529 plan to the wealth-building process.

And let’s not forget the beneficiaries of these 529 plans. As that generation comes of age and uses their education to build strong careers, the conversations with you can continue. By establishing yourself as their trusted advisor early, you may have more opportunities to serve them in the future.

Craig Cheramie, an advisor at Cambridge Securities in New Orleans, recalls attending a Financial Planning Association meeting where many investors were only focusing on setting up standard investments. “I thought, if I help these clients with their 529s, I’m building a future relationship with not only the client, but also with their children,” he says. The next generation is often as successful if not more than your existing clients, with 529 plans being a great tool to build the relationship.

Younger generations are increasingly seeking their financial advice online.⁷ For many, the first experience with benefits of financial advice may be through higher education. A 529 account gives you reason to connect directly to the next generation early, at a time they are reaping the benefits of their investments. Knowing that higher education is within reach helps prove your value statement to the next generation in a tangible way. And remember there’s also an emotional association. If education savings is a client’s first experience with an investment’s drawdown, it could either negatively or positively affect their confidence in future investment opportunities, such as saving for retirement.

While some advisors may view 529s as small and burdensome, including them in your conversation toolkit may help you form deeper emotional bonds with clients and their families. Either way, any conversation about their kids is a conversation they will enjoy having.