Fitting a 529 Plan into Your Estate Plan

529 college savings plans are a great way to fund a college education and they can now also be used for other educational needs. However, they can also be part of your estate plan.

Before exploring a new use for a 529 plan, let’s start with how it has been traditionally used. A 529 is a college investment program, sponsored by state governments and administered by an investment company, as explained by the Cary Citizen in a recent article, “529s and Estate Planning: What’s the Connection?”

MP900439346The investment options are generally mutual fund portfolios, age-based asset allocations that become more and more conservative as the beneficiary gets closer to college age. Some plans also offer static portfolios, with predetermined allocations that stay consistent over time.

Withdrawals from a 529 are tax-free, provided they’re used for qualified college expenses. Nonqualified withdrawals are subject to ordinary income taxes and a 10% additional federal tax penalty. The good news is that the eligibility to contribute to a 529 plan isn’t restricted by age or income.

As far as your taxes, a contribution to a 529 plan is considered a completed gift from the contributor to the beneficiary named on the account. That's good news from an estate tax planning perspective because a contributor can, therefore, potentially reduce the size of her taxable estate using a 529 plan. In 2018, contributions can be up to $15,000 per beneficiary annually and $30,000 per beneficiary, if you contribute jointly with a spouse without any federal gift tax implications.

Along the same lines, if you’d like to decrease the size of your taxable estate more quickly, you can make five years’ worth of gifts in a single year, provided you don’t make any additional gifts to the same beneficiaries for the remainder of that period. Therefore, you can accelerate your contributions and gift $75,000 per beneficiary as an individual or $150,000 per beneficiary, if done jointly with a spouse. However, if you use this strategy, a prorated portion of the contribution may be considered part of your estate, if you don’t live beyond the five-year period.

Whether you contribute annually or on an accelerated basis, a 529 plan can give you a lot of flexibility as part of your estate plan. For example, although the money in the account is considered a gift to the beneficiary, you still have control over how it’s invested. If the beneficiary doesn’t attend college, you can name a new beneficiary who’s a relative of the original beneficiary.

Many families find that they are facing both planning for retirement and saving for college at the same time. The 529 could help with both goals.

Reference: Cary (NC) Citizen (October 31, 2018) “529s and Estate Planning: What’s the Connection?”

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