529 Plans and Estate Planning:

| April 13, 2016
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Most people are aware that college costs are very expensive. In fact, it has gotten too high for many parents. This has caused more and more grandparents to step up to the plate and help - by using a 529 college savings plan for their grandchildren's college education. In today’s blog, we’ll look at how 529 Plans can work with your estate planning goals.  

First, remember that because 529s have big contribution limits, this can give you nice tax advantages and help with estate planning as a bonus. This is because of special tax rules on 529 plans which, for example, allow grandparents to save money for their grandkids while reducing potential gift and estate taxes in the grandparent’s estate.

This method can also avoid the Generation Skipping Transfer Tax (GST - a tax that pops up when you try to give money away to someone more than one generation below you, like a grandchild – it’s a long story). Back to our example…

Say you’re a grandparent with grandchildren and you’re in danger of paying estate taxes. So let’s lay the groundwork on this.

First, keep in mind, an amount you can give away each year without gift tax is called the annual gift tax exclusion and its $14,000 per year. Now this next part is very unique to 529 plans: You can contribute 5 years’ worth of your annual gift tax exclusion all at once to a 529 plan! Five years’ worth all at once!

So doing the math we take $14,000 x 5 years = $70,000. You can drop all of that into a 529 college savings plan in one year! Now if you’re married, you can both give $70,000 for a total of $140,000 all at once, all in one year to each grandchild! But wait, don’t stop there! It gets even better! You can do this every 5 years per grandchild! That’s a lot of jack!

So if you have an estate tax problem, this approach removes this money from your estate thus lowering your estate taxes! To do this you have to make a special election on your federal gift tax return and cannot make any other gifts to the same people during the five-year period.

Example:  Mr. and Mrs. Morgan contribute $140,000 to their grandchild's 529 plan in Year 1, electing to spread the gift over five years.

To the IRS, they have made annual gifts of $28,000 (that’s $14,000 each) in Years 1 through 5 (totaling $140,000). The amount gifted by each spouse is within the annual gift tax exclusion, so the Morgans won't owe any gift tax (they can’t make any other gifts to their grandchild during the five-year period). In Year 6, they can make another lump-sum contribution and repeat the process. In Year 11, they can do so again.

By now you can see how 529 plans allow wealthy parents and grandparents to stuff hundreds of thousands of dollars away gift tax free for their children and grandchildren’s college costs, while reducing their own potential estate tax liabilities.

There is a small catch: if you die during the five-year period, then a prorated portion of the contribution would be "recaptured" into the estate for estate tax purposes.  Do you feel lucky? Thanks for reading!

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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