Not only are Section 529 plans an excellent way to fund a child’s future college expenses, but they’re also an important estate planning tool. Today, all 50 states and the District of Columbia offer 529 college savings plans. Also known as qualified tuition programs, these are tax-advantaged investment opportunities operated by the state’s treasury office. One of the most appealing features of these 529 plans is that accountholders don’t even need to live in a particular state, or send the beneficiary of the plan to college in that state, to participate in a state’s program.
In fact, for wealthier families, a 529 plan offers excellent opportunities to transfer wealth as part of an overall estate strategy. The gift and estate tax treatment of an investment in a 529 plan is a good news, bad news situation. The bad news is that your contribution is treated as a gift to the named beneficiary for gift tax and generation-skipping transfer tax purposes and so you need to be aware of this exposure particularly if you are making other gifts to the beneficiary during the same year. The good news is that your contribution qualifies for the $14,000 annual gift tax exclusion and so most people can make fairly large contributions without incurring the gift tax.
Incentive to make large up front deposits Even better news is that if you make a contribution of between $14,000 and $70,000 for a beneficiary, you can elect to treat the contribution as made over a five calendar-year period for gift tax purposes. This allows you to utilize as much as $70,000 in annual exclusions to shelter a larger contribution. The money (and the growth of your account) gets out of your estate faster than if you made contributions each year.
Asset control plus estate planning benefits And the best news is that the asset leaves your estate but doesn’t leave your control. This is a truly remarkable benefit when you compare it to the “normal” gift and estate tax laws. Anyone who is being advised to reduce their estate tax exposure through gifting, but cannot stand the thought of irrevocably giving away their assets, can now have their cake and eat it too. Of course, if you later revoke the account its value comes back into your estate. Your estate will also have to include a portion of any contribution made with the five-year averaging election if you don’t live past the fourth year.
Sure, no problem. Most 529 savings plans have no state residency requirements. You can open accounts in as many of these states as you want, although in most cases there is little reason to have accounts in more than one or two states.
Can I contribute the maximum amount to each? The IRS currently does not require that states count an investment in other state 529 plans when applying their own contribution limits. And there are no “contribution police” out there looking for people who are intent on using multiple states to stuff hundreds of thousands of dollars into 529 plans as a kind of tax shelter. But you are looking for trouble if you contribute more on an aggregate basis than you can reasonably argue might be needed for your beneficiary’s future higher education costs. Of course, between a pricey private college, medical school, and then business school you might be able to support the need to save a pretty hefty sum. However, a state will not want to see its program misused as a tax shelter (its tax status as a 529 plan could be threatened) and if a state determines that you have made contributions without the intent to use the account for college it will terminate your account and perhaps assess an extra penalty.
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. *Randall A. Denha, j.d,, ll.m., principal and founder of the law firm of Denha & Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. Mr. Denha continues to be recognized as a “Super Lawyer” by Michigan Super Lawyers in the areas of Trusts and Estates Law; a “Top Lawyer” by D Business Magazine in the areas of Estate Planning and Tax Law; a Five Star Wealth Planning Professional and a New York Times Top Attorney in Michigan. Mr. Denha can be reached at 248-265-4100 or by email at firstname.lastname@example.org