How 529 Plans Can Help With Your Estate Planning
If you have children and need to save for their college education, you need to be aware of the benefits of 529 plans. Not only are they a great way to save for your child’s college expenses, they are also an important tool for estate planning purposes.
Basics of 529 Plans
All 50 states offer 529 college savings plans. The accounts are usually operated by the state’s treasury office. One of the advantages of a 529 plan is that you don’t have to live in a particular state to participate, and the beneficiary of the plan does not necessarily have to go to a college in that state. They are also relatively simple in terms of investment management because contributions are pooled and invested in one of two ways: fixed portfolios or age-based portfolios.
529 plans have some important benefits from an estate planning perspective, particularly for those who have too much wealth or income to qualify for other tax-advantaged means of saving for college. First, unlike education IRAs, there are no income limits that prevent higher-income taxpayers from contributing to a 529 plan. So, as a practical matter, virtually anyone can contribute to a 529 plan and take advantage of the tax-free growth of the investment assets. Additionally, individuals can take advantage of their annual gift tax exclusion ($14,000 per individual in 2014) to make gifts to 529 plans. So, a married couple could contribute a total of $28,000 per child in 2014 to a 529 plan without having to file a gift tax return or use up any of their estate tax exemption amount. For those with larger estates, this also reduces your taxable estate by the amount of the gifts, which is a good way to reduce your estate tax bill while investing in your child’s future.
If you’re behind on saving for your child’s college expenses and want to contribute more than the maximum annual gift tax exclusion amount, you can contribute more this year and treat the contribution as being made over five years. For instance, in 2014 an individual can contribute up to $70,000 to a 529 plan ($140,000 for a married couple) and treat the gift as being made over five years rather than being made all this year. By doing this, you reduce the size of your taxable estate by the amount of the gift, and the larger amount will grow tax-free for a longer period than if smaller gifts were made each year for five consecutive years. You may need to file a gift tax return to do this, so you should speak with your estate planning attorney to make sure this is handled correctly.