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My tax adviser is recommending 529 plans as an estate-planning vehicle. What is the advantage?
The unique advantage with 529 plans is that the value of the 529 account is removed from your taxable estate, yet you retain full control over the account including the right to ask for the money back at any time. No other vehicle affords this combination of control and estate reduction.
Some grandparents are being advised by their attorneys, accountants, and financial planners to gift away assets to younger family members as a way to reduce exposure to the estate tax. You can make up to $14,000 in gifts each year to any other person and not be subject to the gift tax. If you do not use this year’s $14,000 annual exclusion opportunity, you lose it. However, like many people who have worked hard to build up their net worth and who are uncertain about what the future may hold, you may be reluctant to follow through with annual gifting because you do not wish to irrevocably part with your assets.
The “excuse” not to utilize your $14,000 annual gift exclusion disappears with a 529 plan. You do not have to give up control. You can ask for the money back whether you really need it or if you just change your mind later on. (Of course, if you take the money back it comes back into your taxable estate. In addition, any withdrawal not used for the beneficiary’s qualifying higher education expenses subjects the earnings to tax and 10% penalty.)
If your contributions to a 529 plan for a grandchild, when combined with all other gifts to that child during the year, exceed the $14,000 annual exclusion, you must file a gift tax return (Form 709) and compute any gift tax and generation-skipping transfer tax. Everyone has a lifetime exemption of $5,250,000 for gifts, estates, and generation-skipping transfers before taxes are owed.
In any year during which your 529 contributions for a particular beneficiary exceed $14,000, you may make an election on Form 709 to spread the contributions ratably over five years (20% per year) for gift-tax purposes. This permits frontloading of up to $70,000 per beneficiary (or $140,000 for a married couple) into a 529 plan without generating a taxable gift, assuming no other gifts to that beneficiary are made during the five calendar-year period. If you make the five-year election and die before the fifth calendar year, the contributions allocated to the years after your death are included in your taxable estate.
- How can I select the right 529 plan if I don’t know where my grandchildren will be attending college?
- What happens if I have money in a 529 account for a grandchild who later decides to not attend college?
- I would like to put some money towards my grandchildren’s college savings, but I’m worried about unplanned medical expenses or other financial needs I may have later on. Can I get my money back out of a 529 plan?
- Which investment option in the 529 plan should I choose for my grandchild?
- We have 16 grandchildren below college age. Should we set up a separate 529 account for each of them, or can we combine the savings into just one account?
- Instead of opening my own 529 accounts, can I just make contributions to the 529 accounts my children have already established for my grandchildren?
- How do Coverdell education savings accounts compare to 529 plans?
- If I ever need to go to a nursing home and apply for Medicaid benefits, will the 529 accounts I have set up for my grandchildren be counted as part of my assets?
- What happens to my 529 plan if I die or become incapacitated?
- Am I hurting my grandchild’s eligibility for financial aid by putting money into a 529 plan for him?
- My tax adviser is recommending 529 plans as an estate-planning vehicle. What is the advantage?
- I’ve been making direct gifts to my grandchild each year into a custodial account (UTMA) with the understanding that those funds are to be used for college. Is there anything wrong with this approach?
- My estate planner tells me I can reduce my estate by paying my grandchildren’s tuition and not even have to worry about the gift tax. So why should I use 529 plans?