When my grandmother passed away a decade ago, all of her grandchildren received a small inheritance. Instead of spending that money on some toy or experience, I opened a 529 college savings account in our oldest child’s name. At the time we had only two daughters, and I had significantly fewer gray hairs.
Fast forward to today. We now have six children, the oldest of whom heads off to college In a few short months. The 529 has grown nearly tripled a 14% average annual growth! It’s enough to pay tuition at my daughter’s target university for at least three semesters. However, I wanted grandma’s heritage to extend to all of my six children, not just the oldest who is the current beneficiary of the 529. How can I divide the 529 equitably among all of the children?
Divide By Dollars
The first attempt is to give each child an equal dollar amount of the 529. Seems fair, right? Each gets the same amount. Just divide by six and hand it out. The 529 has maximum time to grow. Unfortunately, this plan has the obvious flaw that I’d need to wait until child six enters school before it could be divided evenly. Waiting a decade to pay child number one’s tuition isn’t going to fly with the university. This plan also favors the oldest children once you factor in inflation as their tuition bills are nominally smaller.
A variation on this would have been to open 529 accounts for each of my children with the same dollar amount when they were the same age as my oldest. I considered this approach, but I never got around to actually doing it.
Divide By Six
The next approach might be to simply withdraw one-sixth of the account when my oldest enters school and repeat this each time a child starts college. Assuming past annual growth rates, my youngest child would receive over four times the amount the oldest received towards her schooling. The older kids get shafted because they have smaller windows before they enter school.
Divide By Shares
After thinking about this for a while, I finally came to an approach that I’m calling “divide by shares”. Each child gets one “share” per each month since they were born. When each child enters school, I determine their share of the 529 by dividing their shares by the total number of shares of them and their younger siblings.
As an example, when my oldest enters school this fall, she’ll have a little over 170 shares and the total shares for all children is 620. This puts her share at 27% of the total 529 balance, nearly twice as much as she would have gotten if it was divided evenly by six. Assuming the same annual rate of return, her youngest sibling’s dollar amount will be 55% more, but that’s really only a 4%-per-year difference. And wouldn’t you know it? That roughly aligns with the pace that college tuition rates are increasing for her desired college.
This is as equitable as it gets. Here’s a chart that shows the proportion of shares as each child enters school:
Frankly, this solution could be used beyond just 529s. It could be applied whenever the stakeholders have different horizons for when they need access to the money but still want an equitable outcome.
Divide By Reality
In reality, I’m probably not going to divide the 529 by shares or any other way. Because I’m working towards financial independence, my savings and investments probably precludes us from qualifying for much of anything by way of student aid. We’ll see what the FAFSA wizards cook up. I’m guessing I’ll probably be on the hook for a significant chunk of my kids’ college educations. The 529 will just be part of the resources I’ll be using to fund my portion, whatever that may be.
Another frustration with 529s is that while it’s possible to change beneficiaries, in reality mine requires notarized documents, which frankly is a hassle.
My plan is to probably just cash out the balance to pay for my first child’s tuition and boarding, and then provide the same amount to her siblings from non-529 sources.
I let you know how that works out in sixteen years when the youngest is done with her schooling.
Hindsight is 2020
Overall I’m happy with my decision to set aside Grandma Jennie’s inheritance into a 529. My kids are very aware of its existence, and I hope they look to their great-grandmother with fondness, even though only the oldest two met her in this life and they were too young to remember her.
My grandmother’s legacy aside, if I had a do-over I might take a different approach. 529s generally have generally limited investing options and many of them have fees that eat into the return. I put the funds in a 50/50 mix of an S&P 500 index fund and an extended-market index fund, over-weighting the 529 towards small businesses. I feel fortunate that ours has done as well as it has, all things considered.
Are you splitting a 529 among multiple kids? Or maybe you have a unique approach to funding your kids college education? I’d love to hear your ideas.