Outside Economics

529 Plans - An Estate Planning Tool

Posted by Wendell Brock, MBA, ChFC on Wed, Nov 11, 2015

Named after the IRS Code it falls under, Section 529 plans (529 Plans) have amassed over $244 billion in assets since their inception in 1997. Their popularity soared over the years as parents and grandparents realized their favorable tax benefits while also saving for college expenses. These 529 Plans are limited to only “higher education” or post high school education, where as a Coverdell Educational Savings Account can also be used for certain K-12 expenses.

529 Plans were initially intended to provide parents of young children the ability to save and invest money for future anticipated college related expenses, such as, tuition, books, room and board, lab fees, etc.

These plans offer two primary benefits: assets grow tax deferred and come out tax free for qualified expenses; and, contributions made by parents and grandparents are considered a gift, thus proving a tax benefit for some contributors.

Over the years, both wealthy and lower-income parents and grandparents have been the main contributors to these plans. The maximum contribution in to any one plan in Texas is $370,000, this can be made in one payment or through monthly or annual contributions.

Any parent or grandparent can make gifts of up to $14,000 per year per individual person (child) and to as many individuals as they wish. 529 Plans allow gifts to be made five years ahead all at once. Thus, a grandparent can gift $70,000 per grandchild at once for the next five years. If the grandparent has five grandchildren, then they have the ability to contribute $350,000 at once to the 529 Plans, which are considered gifts. There would be no gift tax, assuming no other gifts were made to that child over those years.

Another benefit of 529 Plan is the ability to change beneficiary to another member of the beneficiary’s family. This flexibility allows the family to set up one account for several children as the balance can roll down to the youngest child without any penalties.

Such generous contributions allow a reduction in the contributor’s taxable estate. This is an ideal strategy for parents and grandparents that may have estates valued at over $5.43 million, the current federal estate tax exemption level. The federal estate tax exemption, that’s the amount an individual can leave to heirs without having to pay federal estate tax, is $5.43 million for 2015.

While many people are not in the above situation of needing to reduce their estate size to avoid paying estate taxes; using such a gifting strategy may be advantageous for other family reasons. With the high cost of a college education any help from family should be appreciated by the student.

Selecting the right strategy for college savings or combination of strategies is worth the time and effort. A discussion with your financial advisor of the different strategies and what would make the most sense for your family should be part of the plan, after all next to you no one should know your finances better and how best to integrate the strategies.

 For More Info on College Savings

Source: IRS, Saving For College


Remember the only real control is self control. - Jefrey R. Holland

Topics: College Savings, Section 529 Plans, Estate Planning, Coverdell Education Savings Account


Wendell W. Brock, MBA, ChFC

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