For grandparents

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 $15,000 in gifts in 2018 to any other person and not be subject to the gift tax. If you do not use this year’s $15,000 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 $15,000 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 $15,000 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 $11.2 million for gifts, estates, and generation-skipping transfers before taxes are owed.

In any year during which your 529 contributions for a particular beneficiary exceed $15,000, 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 $75,000 per beneficiary (or $150,000 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.


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