The Cary Citizen asks in a recent article, “529s and Estate Planning: What’s the Connection?” A 529 plan is a college investment program sponsored by a state government and administered by one or more investment companies. The investment options in the plan are usually mutual fund portfolios. They’re “age-based” asset allocations that are more conservative, as the beneficiary gets closer to attending college or static portfolios, with predetermined allocations that stay consistent over time.
Withdrawals from a 529 are tax-free, provided they’re used for qualified college expenses. Nonqualified withdrawals are subject to ordinary income taxes and a 10% additional federal tax penalty. The good news is that the eligibility to contribute to a 529 plan isn’t restricted by age or income.
As far as your taxes, a contribution to a 529 plan is considered a completed gift from the contributor to the beneficiary named on the account. A contributor can, therefore, potentially reduce the size of her taxable estate using a 529 plan. Contributions can be up to $15,000 per beneficiary annually and $30,000 per beneficiary, if you contribute jointly with a spouse without any federal gift tax.
Along the same lines, if you’d like to decrease the size of your taxable estate more quickly, you can make five years’ worth of gifts in a single year, provided you don’t make any additional gifts to the beneficiaries for the remainder of that period. Therefore, 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. However, if you use this strategy, a prorated portion of the contribution may be considered part of your estate, if you don’t live beyond the five-year period.
Whether you contribute annually or on an accelerated basis, a 529 plan can give you a lot of flexibility as part of your estate plan. For example, although the money in the account is considered a gift to the beneficiary, you still have control over how it’s invested. If the beneficiary doesn’t attend college, you can name a new beneficiary who’s a relative of the original beneficiary.
If you’re dealing with estate planning and college financing decisions that affect a growing family, you may benefit by seeing how a 529 plan could play a role in both of these areas.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: Cary (NC) Citizen (October 31, 2018) “529s and Estate Planning: What’s the Connection?”