Monthly top tips

529 E-ditorials

01-11: Loading the 529 gift barrel
Joe Hurley
Sunday, November 18th 2001

In my view too many people are hung up on the $10,000 annual gift tax exclusion as it relates to contributions into 529 plans. You may have the desire, and the financial resources, to save aggressively for future college expenses, but you are constrained in your use of 529 plans by the fact that your contributions are treated as a gift from you to your beneficiary. For any gifts that exceed the annual exclusion amount, you are required to file a gift tax return (Form 709) and report a "taxable gift".

Don't let these rules derail your college savings. Your taxable gifts only create a gift tax liability after you chew through your "lifetime exemption". We each have a lifetime exemption of $675,000, and starting in 2002 the exemption amount goes to $1 million. As long as your cumulative taxable gifts stay below that figure, you won't have to make out a check to Uncle Sam.

Sure, your lifetime gifts can reduce the amount passing to your heirs free of estate tax upon your death. But the estate exemption amount will be increasing gradually from $1 million in 2002 to $3.5 million by the year 2009, and the estate tax is repealed entirely in 2010. If it stays repealed (who knows what will happen as the tax law "sunsets" at the end of 2010?), the net effect is that your lifetime gifts up to the $1 million exemption level will remain federal tax-free. Use it or lose it.

You may be thinking that for most families this is a non-issue. And you are right. The $10,000 annual exclusion (which likely will increase to $11,000 in 2002) is probably more than enough to cover the budgeted college savings for most families, particularly if there are two parents involved (doubling the exclusion to $20,000). Your option to elect a five-year "spread" of a contribution of as much as $50,000 (increasing to $55,000 next year) makes it even less likely that someone has to worry about creating a taxable gift.

But if you are sitting there and thinking about paying to send your child or grandchild to a high-priced private college (and perhaps graduate school after that), and if your investment alternative is one that will show up on your income tax return each year in the form of taxable interest, dividends, or capital gains, then consider loading up in that 529 plan. It's not for nothing that several 529 plans have calculated their contribution maximums at over $230,000 per beneficiary. That *is* the upper-end price tag these days.

Above all, do not rely on this humble 529 E-ditorial in making your college savings decisions. Be sure to speak with your estate planning professional in figuring out the approach that best meets your college savings objectives while minimizing any gift and estate tax exposure.

» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
» Show All Archives


Reset email successfully sent.
Please check your inbox.