Dodge gift-tax limits with 2nd 529 plan


Dear Joe,

Regarding 529 plans: I used the lump sum five-year option to fund a 529 in 2003 when the yearly limit was $11,000. Now that it's gone up, can I contribute an additional $1,000 for this year and future years?

-- Joshua

Dear Joshua,
Yes, you can. This year's increase in the annual gift-tax exclusion amount from $11,000 to $12,000, per donee, allows you to make an additional $1,000 contribution to a 529 plan on behalf of your beneficiary without triggering a taxable gift. You'll have the same opportunity in 2007.

In 2008, your full $12,000 annual gift exclusion frees up as the five-year spread of your 2003 contribution will have ended. (I'm assuming the exclusion amount will still be $12,000 in 2008. At some point, inflation adjustments will push it up a notch, to $13,000 per donee.)

What about increasing this year's contribution to $5,000 and employing the five-year election, again, to spread the contribution over the years 2006 through 2010? If you could do that, your gifts would still fall within the $12,000 annual exclusion amount as you would be reporting only $1,000 of the 2006 contribution to go along with the $11,000 yearly gift created by your 2003 contribution. Unfortunately, it appears this particular strategy will not work. The five-year spreading election is available only when your 529 contributions during the year exceed the annual exclusion amount.

Consider this alternative approach: Contribute $1,000 to your child's 529 plan and place any extra college funds you happen to have on hand into a separate 529 account that names you, not your child, as account beneficiary. Since tax law does not recognize a gift to yourself, you'll be able to park that cash in a 529 plan now without triggering the gift tax. In a later year, simply roll over a portion of your account to the 529 account that names your child as beneficiary. The gift will be recorded at the time of the rollover.

Whenever making contributions to a 529 plan in amounts that create a gift-tax concern, it's a good idea to first check with your attorney or tax adviser. You'll need to coordinate your 529 contributions with any other gifting to your beneficiary during the same year. And you may need some help filing the federal gift-tax return, Form 709, required when making the five-year spreading election.

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