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The Montana Estate Lawyer

Thursday, September 12, 2019

529 Plans and Their Advantages

A 529 plan, otherwise known as a qualified tuition plan, is a tax-sheltered way of saving for education. 529 plans are sponsored by states, state agencies, or educational institutions, and offer several estate planning benefits.

Distributions from the 529 plan, if used for the beneficiary’s qualified education expenses, including tuition, fees, books, supplies, equipment, and a limited amount of room and board, for students at colleges, junior colleges, technical schools, and even, with limitations, primary and secondary schools, are income tax-free.

Even though you can change beneficiaries or get your money back, 529 plan contributions are considered “completed gifts” for federal gift tax purposes.  As such, they are eligible for gift tax annual exclusion, currently $15,000 per year per person, $30,000 for married couples, for any number of recipients. In fact, an individual may even utilize up to 5 years of annual exclusions up front in one year. If the donor dies within 5 years, the value of the annual exclusions for the years into which the donor did not survive would be brought back into the donor’s taxable estate. However, any growth on the funds would be out of the donor’s taxable estate.

Typically, if a donor retains control over assets, those assets are included in the donor’s taxable estate. Uniquely, the donor of the 529 plan can keep control of the plan during their life as the owner of the plan and yet the assets in the plan are still removed from the taxable estate. The account owner can change the identity of the beneficiary. So, if you select a successor owner, he or she could direct the funds away from the beneficiary. If you want to lock down the 529 plan to make sure your successor does not redirect the funds, you could use a trust to hold the 529 plan. However, if you do that, you would be limited to one annual exclusion.

It is common for grandparents to want to help ensure their grandchildren will get a quality education, and at the same time gain the peace of mind that their wealth will be preserved for their children and grandchildren after they are gone. A 529 plan can help accomplish both goals.

For estate tax purposes, all contributions, together with all future earnings, are removed from your taxable estate even though you retain control over the funds. Most estate tax saving strategies require you to relinquish control over your assets, but a 529 plan shields assets from estate taxes even though you retain the right (subject to certain limitations) to control the timing of distributions, change beneficiaries, move assets from one plan to another or get your money back (subject to taxes and penalties).

529 plans accept only cash contributions, so you cannot use stock or other assets to fund an account. A contribution to a 529 plan is not federally income tax-deductible, but may qualify for a state income tax deduction. Income earned in the 529 plan is not taxed currently. In fact, it may never be taxed, depending upon how it is distributed.


Jon


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