A COLLEGE savings plan has become a popular way to save for education. Now it's also being promoted for estate planning.

While some of the plan's features make it an attractive estate planning tool, financial experts advise people to proceed with caution. "Would you do it in every situation? No," said Philip Hayne, an estate planning expert with Principal Financial Group in Des Moines, Iowa. "You have to look at what other options are out there and just try to figure out what makes the most sense."

A college savings plan, often called a 529 plan after the section of the federal tax code creating it, is offered by almost every state.

Generally, one person is named as the account owner and contributions are made on behalf of a beneficiary, who may be a child, adult or the account owner. The money is invested and not only does it grow tax-deferred, but also, thanks to last year's tax law, earnings can be withdrawn tax-free if the money is used for college.

One advantage of the 529 plan for estate planning is that big contributions can be made without triggering gift taxes.

Individuals are permitted to give anyone up to $11,000 each year without gift tax consequences. But the college savings plan allows a donor to contribute five years' worth of gifts, or up to $55,000, in a single year without triggering a gift tax. It also removes those dollars immediately from his estate, so the money and any earnings are not subject to estate taxes later.

Another benefit is that the account owner maintains much control. The owner can change beneficiaries if a child decides not to go to college. Or, the owner may withdraw the cash herself, although she will owe ordinary income tax and a 10 percent penalty on the earnings if the money isn't used for college.

The plan is easier and less expensive to set up than are some other estate planning options.

"It's very simple," said Phil Drudy, an accountant with Mintz Rosenfeld & Co. in New Jersey. "You go online and get an application. You fill it out and send a check to some state and you're done."

But the 529 involves potential snags of which estate planners should be aware.

Plan rules differ from state to state, and a perk offered by one plan might not be available from another. College savings plans haven't been around long, and questions remain that haven't been resolved by the Internal Revenue Service, experts said.

And the plans can have unintended consequences.

For example, a grandparent might contribute to a plan to reduce assets in his estate but end up reducing the amount of need-based financial aid the grandchild might have received, said Lisa Schneider, a lawyer in West Palm Beach, Fla.

Here are other issues:

Premature death. Making five years' worth of gifts at once to remove the assets from an estate works only if the donor lives for five years. If he dies earlier, say in the second year, only two years' worth of donations, or $22,000, will be considered removed from the estate. The other $33,000 will be part of the estate for tax purposes.

"It can backfire," especially for a grandparent who has set up accounts for multiple grandchildren, Schneider said.

There's another way to get thousands of dollars out of the estate while helping a student, said Christine Fahlund, senior financial planner with T. Rowe Price Associates in Baltimore, which manages Maryland's college savings plan. An individual can pay a student's tuition directly to the school, from kindergarten to college. That avoids gift tax issues entirely, even if tuition is higher than $11,000 a year, Fahlund said.

Beneficiary changes. The plan permits a change of beneficiaries. But when the beneficiary is switched from one generation to a younger generation, gift tax issues can be triggered, Fahlund said.

In such a case, it's a problem not for the owner, but for the original beneficiary, she said.

For example, a mother names her daughter as a beneficiary, but the money goes unused. Later, the mother decides to make a grandchild the beneficiary. The money would be considered a gift from the daughter to the grandchild, Fahlund said. Depending on the size of the account, the gift could reduce the amount of money the daughter would be able to give over her lifetime free of tax.

Successor. A college savings plan allows an owner to name a successor. That's useful if, for instance, an owner is in poor health and wants to turn over the responsibility of the account to someone else, Fahlund said.

But choose a successor carefully, because once the reins are turned over, the successor controls the account, Fahlund warned. "The risk you run is that they could always try to liquidate the account and take the money and run," she said.

Creditor protection. Whether creditors can make a claim against an account's assets depends on state law. About half of the states protect the funds from creditors, said Joseph Hurley, founder of Savingforcollege.com and a plan expert. Maryland provides that protection.

But what happens if the account owner lives in a state offering asset protection but invests in the plan of a state that doesn't? Or the other way around?

"How that translates across borders is pretty untested," Hurley said. "If you're concerned about that aspect, you should really talk to your attorney."

Medicaid. Because an account owner maintains control over the money in the plan, the assets could make the owner ineligible for Medicaid, the government program that pays for long-term care, experts said.

"If there is any circumstance, any way, shape or form that you can get this money ... it counts as an asset that you would have to get rid of" to be eligible, said Jason Frank, a Lutherville elder-law attorney.

Overfunding. People can set aside hundreds of thousands of dollars in some plans, but Hurley warns against salting away more money in a 529 plan than is needed for college, because of the tax and penalty assessed on money not used for education.

Noting another reason, he said, "Who knows if the government might change the rules down the road and put a crimp in your plans to have this around for a long time?"

To suggest a column idea, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.