529 Plan- Estate Planning Before Year End- Part 2

What is a 529 Plan? It is basically a college savings plan sponsored by states, state agencies and certain educational institutions.

Consider funding a 529 plan before December 31st to use your annual gift tax exclusion of $14,000 ($28,000 for married couple) per recipient. Moreover, you have the option of using up to five years of gift tax exclusions in a single year, allowing you to make an accelerated gift through a 529 plan of up to $70,000 ($140,000 for couples) per beneficiary without generating gift tax or using any of your gift tax exemption.

There is no specific amount limitation on the amount of contribution; however, the tax code requires the plans to provide “adequate safeguards to prevent contributions on behalf of a designated beneficiary in excess of those necessary to provide for the qualified higher education expenses of the beneficiary”. Your contribution to the 529 plan effectively removes the cash assets (and any future earnings) from your taxable estate.  Anyone can set up a 529 plan, i.e. parent for child, grandparent for grandchild — you don’t have to even be related.

Some advantages of the 529 plans are that, even though the contributed cash asset is no longer included in your estate for estate tax purposes, you still retain certain rights to change beneficiaries, control the timing of the distributions, move the assets from one plan to another. You can also get your money back subject to certain taxes and penalties.  The contributions to the 529 plan are not deductible for federal income tax purposes; however, any distributions (including accrued earnings) for “qualified higher education expenses” are not taxable.

Note that the 529 plan accounts will be treated as the parents’ assets on a student’s financial aid application if the student files as a dependent, and that there are administrative fees associated with these plans.

Overall 529 plans are very attractive education savings vehicles and should be considered if college or higher education expenses are in your future. Consult with your estate planning attorney about 529 plans and other education savings options.

Part 3 will address the topic of charitable giving.

Gita K. Nassiri | Attorney at Law/ CPA
2794 Gateway Road 
Carlsbad, CA 92009