By: Barry E. Haimo, Esq.
December 13, 2018
How 529s Should Factor into Your Estate Plan
The Qualified Tuition program (QTP) — popularly known as the 529 plan — is one of the various education plans that are used to finance higher education learning for many students in the US. 529 was coined from the Internal Revenue Code Section 529 that Congress enacted in 1996 to encourage college saving.
The 529 saving plan may complement your estate plan in a variety of ways.
How 529 Savings Work
The 529 is a state-sponsored investment program offered through different investment companies. 529s may be mutual portfolios that are age-based, or they can be static fund portfolios.
Static fund portfolios have a predetermined allocation that’s constant at all times. Age-based portfolios are target funds whose asset allocations gradually get more conservative as they approach a specific target date when the beneficiary is expected to start college (the time when the investor begins to withdraw funds).
529 withdrawals are usually tax-free as long as payments are being made to finance college education. Other withdrawals that do not finance college expenses may still be made, but ordinary income tax and an additional 10% federal tax is charged.
Anyone can contribute to a 529 investment plan irrespective of their age or income.
529 and Estate Planning
In the eyes of the taxman, 529s are seen as completed gifts to the beneficiary from the contributor but no gift taxes are attached to 529 plans. This makes 529 plans an excellent tool through which a person may reduce his or her taxable estate.
The maximum annual contribution to each beneficiary is $15,000 when contributing as an individual and $30,000 when contributing in joint association with a spouse.
The IRS also makes provisions for accelerated contributions in which the contributor may deposit five years’ worth of gifts within a one-year period so long as no additional gifts are made to the same beneficiary for the rest of the five-year period.
One may, therefore, gift $75,000 to each beneficiary, or $150,000 if the contributions are made jointly with a spouse. You may consider this an ingenious way of rapidly reducing the extent of your taxable estate.
Another benefit of a 529 plan is the GSTT (Generation-Skipping Transfer Tax). This taxation rule applies to grandparents who adopt the 529 investment plan. Individual gifts that are $15,000 or less, and joint gifts of $30,000 or less are excluded from GSTT taxation.
The contributions that you pay to a 529 plan are generally not considered to be part of your estate, and therefore no federal tax is charged when you pass on. Instead, the value of the 529 account is usually included in the estate of the beneficiary.
There’s an exception to this tax rule when you spread the gift out over a five-year period but die before this period ends. In such a case, the gift contributions for the years that come after your death are counted along with the rest of your gross taxable estate.
Estate planning and educating your loved ones are two important aspects of every parent or grandparents’ life. The 529 investment plan generally lightens the burden when dealing with the two. A Florida estate planning attorney can help you see what role a 529 plan may play as you plan your estate.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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