Assets in 529 plans have grown significantly in recent years due to their college planning potential. But there’s another side to 529 plans that may appeal to you; potential estate planning benefits.
First, to understand how a 529 college savings plan may complement an estate plan, it’s important to start with a basic review of how a 529 plan works. A 529 plan is a college investment program sponsored by a state government and administered by one or more investment companies. The underlying investment options typically are mutual fund portfolios. Withdrawals are federally tax free (and state tax free in many cases) as long as they are used to finance qualified college expenses. Non-qualified withdrawals are subject to ordinary income taxes and a 10% additional federal tax penalty on earnings. Eligibility to contribute to a 529 plan is generally not restricted by age or income.
Now here’s the estate planning angle. A contribution to a 529 plan is considered a completed gift from the contributor to the beneficiary named on the account. A contributor, therefore, can potentially reduce the size of his or her taxable estate using a 529 plan, while maintaining control of the assets. You may contribute up to $15,000 per beneficiary annually, $30,000 per beneficiary if you contribute jointly with a spouse, without triggering the federal gift tax. So, if you have three grandchildren, for example, and you maintain a 529 plan account for each one, you could remove $45,000 a year from your taxable estate, or $90,000 if you make the contributions jointly with a spouse. If you want to reduce the size of your taxable estate more quickly, the IRS permits you to make five years’ worth of gifts in a single year as long as you do not provide additional gifts to the beneficiaries for the remainder of the five-year period. In other words, you can accelerate your contributions and gift $75,000 per beneficiary as an individual or $150,000 per beneficiary if done jointly with a spouse. Keep in mind, however, that if you use this strategy, a prorated portion of the contribution may be considered part of your estate if you do not outlive the five-year period. Regardless of whether you contribute annually or on an accelerated basis, a 529 plan may provide considerable flexibility as part of your estate plan. One of the main advantages of this strategy, compared to say an irrevocable trust, is that even though the money in the account is considered a gift to the beneficiary (out of your estate), you maintain ownership of the account. Also, keep in mind that if the beneficiary does not attend college, you can generally name a new beneficiary who is a relative of the original beneficiary, such as a sibling or cousin. If you’re grappling with estate planning and college financing decisions that impact a growing family, you may benefit by familiarizing yourself with how a 529 plan could play a role in both of these key areas.
Source/Disclaimer: Investing in 529 plan involves risk, including loss of principal. Before you invest in a 529 plan, request the plan’s official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider before investing. You should also consider whether your home state or your beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s 529 plan. Section 529 plans are not guaranteed by any state or federal agency. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state’s plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.
Content for this material is for general information only and not intended to provide specific advice or recommendations for any individual. Future tax laws can change at any time and may impact the benefits. Their treatment may change. Limitations and restrictions may apply. Securities and advisory services offered through LPL Financial, Member FINRA/ SIPC
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