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529 E-ditorials

01-12: The Gift of Education
Joe Hurley
Tuesday, December 4th 2001

Does the idea of trudging through the shopping malls searching for holiday gifts for family members hold little appeal for you? If the answer is 'yes', then consider the alternative of making a contribution to their college savings accounts. Section 529 plans can be the perfect vehicle for doing this, although there are a few things you need to think about.

Your basic options in making this type of gift are as follows:
Gift the parent a check along with a specific request that the check be used to fund a Section 529 college savings account. Unfortunately, you have no control over whether the money is actually used for that purpose or not.

Set up the account yourself with the child as beneficiary. Make the contribution and let the parent know that you have done this as your gift. You retain control of the account (including the power to revoke it or change the beneficiary), which is nice for you. However, the parent may not see that you have done anything gift-worthy seeing how you still own the account.

Find out if the parent has already established an account with a 529 plan, and send your contribution directly to the plan. This gets the money where everyone wants it, but it can be a little cumbersome because it requires that you first obtain an account number (and perhaps a deposit coupon) from the parent.

Ask the parent if an account has been established and if so, find out which state's program they use. Gift the parent a check made out to the name of the 529 plan they use. The parent will then be responsible for sending in your check to the program.
I prefer this last approach. It doesn't require that you ask the parent for the account number, and it passes control of the contribution to where it really belongs (with the parent). Because you make out the check to the 529 plan, you can be sure that it will be deposited for that purpose.

What do you do if the parent does not already have a 529 plan account? In that situation you should make the program selection yourself. Find one that you feel will work well for the family. Assuming your gift contribution is relatively modest, you will probably want to select a program that has zero or low enrollment and annual account maintenance fees. If it does have those fees, be sure your contribution is large enough to cover that cost. When you gift the parent the check (made out to the program name you have selected), it will be up to the parent to enroll in that program. This is a good thing, because it will force the parent to think about college savings and to learn something about 529 plans.

In making gift contributions to a 529 plan, other considerations can come into play. One is the possibility of a state income tax deduction in the state where you live or where the parent lives. In some states, you will be eligible for a deduction, while in other states only the parent will be eligible. Be sure to note that states offering a deduction for contributions only allow it for contributions to their own programs.

Another consideration is gift taxes. A contribution that you make indirectly through the parent will be treated differently from one you make directly to the 529 plan. Check with your adviser if you have concerns about this.

» 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
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