COLLEGE SAVINGS 101

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529 plan strategy untouched by estate tax repeal
http://www.savingforcollege.com/articles/20100212-529-plan-strategy-untouched-by-estate-tax-repeal

Posted: 2010-02-12 - Lori Johnston is a freelance writer in Georgia

by Lori Johnston

A cloud of confusion surrounds the temporary repeal of the federal estate tax, but parents or grandparents have no reason to adjust their 529 plan college savings strategies.

If you've contacted your attorneys, accountants or financial advisers to question the impact on your 529 plans or other college savings vehicles, you're not alone.

"They're confused. That's the key word right there," says Rett Peaden, an attorney specializing in estate planning and taxation with the Atlanta law firm Davis, Matthews & Quigley. "For college savings and helping to pay for a child or grandchild's college, the rules are still the same."

Congress' failure to take any action in 2009 means there is no estate tax or Generation-Skipping Transfer Tax, or GST, for 2010.

The current GST was enacted by Congress in 1986 to tax estates left to grandchildren or great-grandchildren in order to avoid being double-taxed when the estate passed to their children and then, in turn, to the grandchildren. It applied to estates valued at more than $2 million and was taxed at the rate of 45 percent.

Both the estate tax and the GST were repealed as of Jan. 1, 2010, but the law repealing them expires this year, so unless Congress acts, both will return with the dawn of 2011.

The estate tax -- which in 2009 was taxed at a rate of 45 percent -- exempted the first $3.5 million. If you are "fortunate" to die in 2010, your heirs will not have to pay any estate tax. But if you make it to 2011, the tax is back with "only" a $1 million exemption and likely at higher rates.

The GST also will return in 2011 -- with a $1 million exemption and a taxable rate of 55 percent.

How does that affect planning for college savings? Continue to execute the plan you have in place, say experts, because it's difficult to know what could happen next with the estate tax.

While the estate and GST taxes don't apply to anyone who dies during 2010 under the law as written, Congress could re-enact the tax at any time.

The impact on 529 plans and other college savings vehicles would be different if changes had been made to the annual gift tax exclusion. The gift tax remains in effect during 2010, with a $1 million exemption amount and a gift tax rate of 35 percent, down from 45 percent in 2009.

"People can still take advantage of those $13,000-a-year annual gift exclusions," Peaden says. "529 plans are still a viable option. They remain pretty much unchanged."

State income tax considerations, often a key benefit for those who invest in 529 plans, also remain unchanged.

"The simple message is to stay the course and don't do anything differently," says Greg Wilder, partner in charge of the private wealth services practice for the Southeast region at Grant Thornton LLP, a global audit, tax and advisory organization with its national office based in Chicago.

"We know the law is going to change. (But) nobody knows what it's going to change to or when it's going to change," he says.

The prospect of the estate tax repeal extending beyond 2010 is slim to none, Wilder says.

"For 2010, we're not having to contend with the generation-skipping tax, but the gift tax is still there," says Lee Drake, managing shareholder of Davis, Matthews & Quigley. Drake says he expects the generation-skipping transfer tax to be back in 2011."

An opportunity for the wealthy

People making contributions to a 529 plan have the ability to frontload those contributions without paying a federal gift tax. You can contribute $13,000 a year without filing a gift tax return with the Internal Revenue Service, or as much as a $65,000 contribution in one year, which covers the current year's gift and four more years, without incurring gift taxes.

If you’re the donor and you pass away at any time before the fifth calendar year of the election period, some of what you’ve prorated will be included in your estate.

"Since there's no estate tax for 2010, it doesn't apply," Peaden says. "There is no downside for having that money included back in your estate. There is maybe a little less risk of frontloading it."

Wilder says some people also are considering taking a gamble and loading funds into a traditional trust for a child, such as a 2503(c) Minor's Trust, which holds the money until the child turns 21. The only advantage is if they've used all of their million-dollar exemptions, the gift tax rate is 35 percent, compared to 45 percent in 2009.

"Some clients are looking at making taxable gifts for the benefit of the likely temporary 35 percent rate we're dealing with today," Wilder says.

Some aggressive investors who want to make large transfers of wealth are considering this is the time to do it because of no generation-skipping tax. That decision is a little bit of roulette, Wilder says.

If you want to transfer money to an account for a grandchild, the risk you're taking is if Congress passes something later and reinstates it retroactively, he says.

"I don't know of too many people willing to take that risk right now," Wilder says.

Posted February 12, 2010

A cloud of confusion surrounds the temporary repeal of the federal estate tax, but parents or grandparents have no reason to adjust their 529 plan college savings strategies.

If you've contacted your attorneys, accountants or financial advisers to question the impact on your 529 plans or other college savings vehicles, you're not alone.

"They're confused. That's the key word right there," says Rett Peaden, an attorney specializing in estate planning and taxation with the Atlanta law firm Davis, Matthews & Quigley. "For college savings and helping to pay for a child or grandchild's college, the rules are still the same."

Congress' failure to take any action in 2009 means there is no estate tax or Generation-Skipping Transfer Tax, or GST, for 2010.

The current GST was enacted by Congress in 1986 to tax estates left to grandchildren or great-grandchildren in order to avoid being double-taxed when the estate passed to their children and then, in turn, to the grandchildren. It applied to estates valued at more than $2 million and was taxed at the rate of 45 percent.

Both the estate tax and the GST were repealed as of Jan. 1, 2010, but the law repealing them expires this year, so unless Congress acts, both will return with the dawn of 2011.

The estate tax -- which in 2009 was taxed at a rate of 45 percent -- exempted the first $3.5 million. If you are "fortunate" to die in 2010, your heirs will not have to pay any estate tax. But if you make it to 2011, the tax is back with "only" a $1 million exemption and likely at higher rates.

The GST also will return in 2011 -- with a $1 million exemption and a taxable rate of 55 percent.

How does that affect planning for college savings? Continue to execute the plan you have in place, say experts, because it's difficult to know what could happen next with the estate tax.

While the estate and GST taxes don't apply to anyone who dies during 2010 under the law as written, Congress could re-enact the tax at any time.

The impact on 529 plans and other college savings vehicles would be different if changes had been made to the annual gift tax exclusion. The gift tax remains in effect during 2010, with a $1 million exemption amount and a gift tax rate of 35 percent, down from 45 percent in 2009.

"People can still take advantage of those $13,000-a-year annual gift exclusions," Peaden says. "529 plans are still a viable option. They remain pretty much unchanged."

State income tax considerations, often a key benefit for those who invest in 529 plans, also remain unchanged.

"The simple message is to stay the course and don't do anything differently," says Greg Wilder, partner in charge of the private wealth services practice for the Southeast region at Grant Thornton LLP, a global audit, tax and advisory organization with its national office based in Chicago.

"We know the law is going to change. (But) nobody knows what it's going to change to or when it's going to change," he says.

The prospect of the estate tax repeal extending beyond 2010 is slim to none, Wilder says.

"For 2010, we're not having to contend with the generation-skipping tax, but the gift tax is still there," says Lee Drake, managing shareholder of Davis, Matthews & Quigley. Drake says he expects the generation-skipping transfer tax to be back in 2011."

An opportunity for the wealthy

People making contributions to a 529 plan have the ability to frontload those contributions without paying a federal gift tax. You can contribute $13,000 a year without filing a gift tax return with the Internal Revenue Service, or as much as a $65,000 contribution in one year, which covers the current year's gift and four more years, without incurring gift taxes.

If you’re the donor and you pass away at any time before the fifth calendar year of the election period, some of what you’ve prorated will be included in your estate.

"Since there's no estate tax for 2010, it doesn't apply," Peaden says. "There is no downside for having that money included back in your estate. There is maybe a little less risk of frontloading it."

Wilder says some people also are considering taking a gamble and loading funds into a traditional trust for a child, such as a 2503(c) Minor's Trust, which holds the money until the child turns 21. The only advantage is if they've used all of their million-dollar exemptions, the gift tax rate is 35 percent, compared to 45 percent in 2009.

"Some clients are looking at making taxable gifts for the benefit of the likely temporary 35 percent rate we're dealing with today," Wilder says.

Some aggressive investors who want to make large transfers of wealth are considering this is the time to do it because of no generation-skipping tax. That decision is a little bit of roulette, Wilder says.

If you want to transfer money to an account for a grandchild, the risk you're taking is if Congress passes something later and reinstates it retroactively, he says.

"I don't know of too many people willing to take that risk right now," Wilder says.

Posted February 12, 2010

 

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