Great gift: College cash in a 529 plan

http://www.savingforcollege.com/articles/20090612-gift-cash-529-plan

If you're looking to make an impact in a child's life without buying the latest trendy toy, consider providing cash for a 529 plan.

"Kids often get gifts and rip through them faster than it takes to wrap them and forget about them shortly after that," says June Walbert, a Certified Financial Planner at USAA Financial Planning Services in San Antonio. "But if you get a small gift plus some funding in a college savings account, you're getting the best of both worlds."

A 529 plan is a great way to save for college because contributions grow tax-deferred, and withdrawals are tax-free. Helping fund a 529 college savings account for a grandchild, friend or someone else doesn't just benefit them — it has potential tax savings for you.

There are several ways to contribute to a 529 program, so consider the child's interests as well as your own as you determine the best method for you. Whether your goal is simplicity, a tax break or effective estate planning, there are smart ways to give and structure your gift.

First steps

Before signing on to a 529 program, talk to the parents of the child to make sure they ultimately want their child to go to college.

The beneficiary's parents may have already started a 529 program and may request that any gifts go into the same program. You'll also want to find out if they already have a regular savings program. In some cases, the beneficiary may not need the funds. "If they're receiving large gifts from both sets of grandparents, for example, they may have enough in the account already," says Walbert. "You definitely want to avoid overfunding the account."

If you're planning on setting up a new account for the child, you'll need a few basic pieces of information, including the beneficiary's address, date of birth and Social Security number. Sifting through the hundreds of programs offered across the country can be challenging, but finding a program with low fees — less than 1 percent — in your home state is often a good place to start.

Hassle-free gifts

If you plan to give a small one-time or annual gift — less than $500 — you should look closely at college savings registries such as Freshman Fund or Ugift. Ugift works with five Upromise plans in four states, and Freshman Fund works with all 529 plans. Minimum gift requirements range from $5 to $15.

Such registries have significant benefits for donors: They have low minimums and don't require ongoing contributions, and if parents have already set up the account for their child, there's no hassle in transferring the funds. (If parents haven't set up an account, you can set up one for them easily.) You can even use a calculator to see what your $100 gift will be worth when Junior heads off to college.

Better yet, you can use the registry even if your gift won't meet the initial funding requirement for the plan you've chosen, says Jason Olim, co-founder and CEO of Freshman Fund in New York. "If there is a minimum deposit for your plan, we hold the money in an FDIC-insured account until the minimum is reached," he says. "Then we deposit the money into the 529, and you'll receive notification."

Savings registries are ideal for those who don't plan to give substantial gifts and who want to avoid the complexity and paperwork that often accompanies setting up 529 savings plans.

Strategic gifts

If you have a more substantial gift to help fund a 529 program, you have an array of options to consider. These choices can help you save money on taxes and even develop your estate plan. Here's what to keep in mind.

• State taxes. While you don't get a federal income tax deduction on 529 contributions, more than 30 states offer at least a partial state income tax deduction. If you plan to make a major gift and your state provides a break, you will likely want to make it to one of your own state's plans. Your beneficiary will still be able to use it regardless of where he or she lives or goes to college. If your state offers tax parity for 529 plans, you may have even more flexibility, says Mary McConnell, director of college savings products for Charles Schwab. Six states — Pennsylvania, Arizona, Minnesota, Montana, Kansas and Missouri — offer tax parity for 529 plans. If you live in one of these states, you can contribute to any 529 plan, not just those in your state, and receive a state tax deduction for your contributions.
• Gift maximums. Starting in 2009, you can contribute up to $13,000 each year to a 529 program without incurring a gift tax. If you have a spouse, together you can give up to $26,000 without incurring the tax.
• Gift tax exclusions. Interested in giving even more than the typical $13,000 limit? Because 529 accounts have special gift-tax exclusions, you can give five years' worth of gifts at once — $65,000 for one person or $130,000 for a couple. "It's a great opportunity, from a gifting and estate planning point of view, to be able to move the money out of a taxable estate and have the reward of gifting to someone for their future," says McConnell. Five years later, you can repeat the gift.
• Ownership and estate planning. In any 529 plan transaction, there are three parties, says Christine Moriarty, president of MoneyPeace in Bristol, Vt.: the beneficiary, the donor and the owner of the plan. Often, the donor and the owner are the same person. However, if you'd like to move your gift out of your estate to avoid potential taxes, you must transfer your gift to another owner. In general, you would designate the parent as the owner, but it could be anyone you trust. If you're not concerned about estate and tax consequences, you can keep the money under your control and even withdraw it if necessary.

Posted June 12, 2009