Broker Check

529 GIFTING AND ESTATE PLANNING STRATEGIES

Never Too Affluent For 529 Plans:

High-net-worth individuals are in a unique position when it comes to financing their children’s college education. Not only do they want to provide the best education money can buy, they also may be seeking ways to reduce their taxable estate while creating an education legacy for future generations.

Know the basics

A 529 plan — named for the section of the Internal Revenue Code that authorizes them — is a tax-favored savings plan designed to help families save for college costs. 529 plans may be operated by either a state or higher education institution. States may operate both prepaid and savings plans (most states offer only savings plans), while higher education institutions may offer only prepaid plans.

Understand plan contributions and limits

529 college savings plans can only accept contributions made in cash. The maximum contribution limit is plan-specific and may vary widely. For example, the maximum contribution per beneficiary for Georgia’s 529 plan is $235,000, whereas the maximum contribution for New York’s 529 plan is $520,000.

Tax Benefits of 529 Plans and their Distributions

Contributions are made on an after-tax basis; that is, the donor does not receive a federal tax deduction for contributions. Earnings accumulate tax-deferred, and distributions are federal income tax-free if used for qualified higher education expenses of the beneficiary. An eligible institution is any higher education institution, either U.S. or foreign, eligible to distribute federal financial aid. For distributions taken for reasons other than to pay for qualified higher education expenses, the earnings portion of these non-qualified distributions may be subject to income taxation and an additional 10% penalty.

Qualified expenses at eligible institutions include:

  • Tuition
  • Room and board (subject to certain conditions)
  • Computers
  • Books
  • Supplies and equipment required for the course of study at an eligible institution, as well as certain expenses for special needs beneficiaries.

Benefit #1: A 529 donor’s gift is complete for federal gift tax purposes

For 2019, each person has an annual federal gift tax exclusion of $15,000, or $30,000 for a married couple. For each donor, a separate annual exclusion applies to each person to whom a gift is given. So a person generally can give up to $15,000 each to any number of people, and none of the gifts will have gift tax consequences. Contributions to a 529 plan qualify for the annual gift tax exclusion.

Benefit #2: The 529 account owner maintains rights of property

529 plans allow the account owner, not the beneficiary, to retain control of the account assets (some conditions apply). This is a significant advantage that 529 plans have over other gifting and estate planning vehicles. Consequently, the account owner has the freedom to decide — for any reason — to change beneficiaries on the 529 plan (though there may be gift or GST tax consequences) or to recall the assets.

Benefit #3: 529 assets are excluded from the donor’s or owner’s estate

Although the account owner retains control of the assets in a 529 plan, those assets are excluded from the donor’s or owner’s taxable estate (subject to the limited exception explained previously, i.e., if the donor dies during the five-year period associated with the accelerated gifting option).

Benefit #4: 529 plans are flexible

529 plans are flexible because the account owner can:

  • Roll over money between beneficiaries who are family members, without income tax ramifications
  • Change beneficiaries within the family and still preserve tax benefits
  • Change the beneficiary to future heirs and still avoid gift tax consequences by managing the gift process, as outlined later in this paper
  • Name a successor account owner who will assume control of the account upon death of the account owner while avoiding probate