529 Education Savings Plan

How Can I Help Pay For a Grandchild’s College Tuition?

To help pay for a grandchild’s college tuition, you may want to defer the receipt of funds, until the grandchild needs to pay for tuition down the road. You can make a gift into a custody account or into a trust that qualifies as a current gift under the Uniform Gifts to Minor’s Act, or you can fund a Qualified Tuition Plan under IRC Section 529.

pay for a grandchild's college tuition
There are a few good, tax-free options for anyone who wants to help pay a grandchild’s college tuition.

Forbes’ recent article entitled “Estate Planning Primer: Qualified Tuition Plans” explains that there are two kinds of 529 programs: prepaid plans and savings plans. The advantage of a 529 plan over a Unified Gift to Minors Act plan is that the earnings on the assets in the 529 plan aren’t taxed, until the funds are distributed. The distributions are also tax-free up to the amount of the student’s “qualified higher education expenses.”

Prepaid Programs: Some colleges let you buy tuition credits or certificates at current tuition rates, even though your grandchild won’t be starting college until several years in the future. This allows you to lock in today’s rates for her enrollment many years later. This move can result in substantial savings, since tuition continues to rise at most colleges and universities and can often provide the biggest bang for your buck when you help pay for a grandchild’s college tuition.

Savings Programs: Similar to a Traditional IRA or a Roth IRA, tuition amounts covered by a savings plan are dependent on the investment performance of the money you have in the plan. If it grows, more cost can be covered. But if it declines, less will be covered. Therefore, it is good to be conservative, if the need for distributions is coming soon.

Qualified Higher Education Expenses: Tuition (including up to $10,000 in tuition for an elementary or secondary public, private, or religious school), fees, books, supplies, and required equipment, as well as reasonable room and board are qualified expenses, if the student is enrolled at least half-time. Note that distributions in excess of qualified expenses are taxed to the student, if they represent earnings on the account. A 10% penalty can also be imposed.

Beneficiary: The beneficiary of the program is specified when you start the funding. However, you are able to change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without income tax liability.

Eligible Schools: If you’re going to help pay for a grandchild’s college tuition you need to make sure that they are going to attend an eligible school.  Any college, university, vocational school, or other post-secondary school eligible to participate in a student aid program of the Department of Education will be eligible schools for these programs.

The contributions made to the qualified tuition program are treated as gifts to the student. They qualify for the annual gift tax exclusion ($15,000 per person per year for 2020) adjusted annually for inflation. If your contributions in a year exceed the exclusion amount, you can elect to take the contributions into account over a five-year period starting with the year of the contributions.

Note that you may not be able to make the distributions from the program when a very young (or unborn) beneficiary goes to college, so name an alternative custodian, perhaps a parent of a grandchild, to make distributions for you.

Reference: Forbes (Aug. 5, 2020) “Estate Planning Primer: Qualified Tuition Plans”

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?”

How Does Medicaid Treat College Savings Funds?

Saving for college but needing to receive Medicaid is a complicated equation.

The answer “It depends” is not much of a comfort when considering how college savings accounts will be treated for Medicaid purposes.  However, it is, unfortunately, the most accurate answer. There are several factors that must be considered:

  • What type of account you used to set aside the college money;
  • How and when you funded the account; and
  • Whether you still have access to the money.

A recentnj.com article asks, “Will my college savings be counted for Medicaid?” If you can liquidate an account and access the money that you deposited, Medicaid will typically expect you to do so to fund your own care for as long as possible. Another challenge is that Medicaid will always penalize gifts. Odds are good that the funds you added to these college accounts are gifts.

MedicaidHowever, there may be an exception: if the account was funded prior to the 60-month lookback period, the applicant can’t be penalized for making a gift.

Let’s examine why the type of account is also important.

If the money was put into a 529 plan, the funds aren’t part of the donor's taxable estate, and the assets aren’t includible. However, if the funds are invested in an account “ITF” (“in trust for”) a grandchild, then the funds would be includible. It its calculations, Medicaid examines all assets in the name of the applicant. Assets held in 529 plans—although the donor's name may be shown as the participant—are deemed to be a gift, when the assets are transferred and, therefore, are no longer the donor's asset.

To be safe, grandparents who set up 529 plans for their grandkids should change the participant to the grandchild's parent or guardian. This entirely disconnects the donor's name with the account.

If the grandparent just added a grandchild's name on one of his savings accounts, then that would be includable. This is true even if it were completed more than 60 months earlier, because it wouldn’t be deemed to be a completed gift.

When it comes to the intersection of college savings and Medicaid, you may need to speak with an elder law attorney who will be able to review how the college savings assets are owned, and whether or not they’ll impact your Medicaid eligibility.

Reference: nj.com (September 19, 2018) “Will my college savings be counted for Medicaid?”

If You Have 529 or ABLE Accounts, Be Prepared for Changes

Notice 2018-58 talks about changes to tax laws that will impact 529 plans related to tuition refunds, K-12 education and rollovers to ABLE accounts for disability-related expenses.

Tuition refunds, K-12 education costs and rollovers to ABLE accounts for disability-related expenses, will now reflect recent tax law changes.

MP900442387New regulations that reflect changes from the 2015 Protecting Americans From Tax Hikes (PATH) Act, and the 2017 tax overhaul will be issued by The Internal Revenue Service (IRS) and Treasury Department, as reported by Think Advisorin the article, “IRS, Treasury to Issue 529 Plan Regs.”

Notice 2018-58 talks about changes to tax laws that will impact 529 plans related to tuition refunds, K-12 education and rollovers to ABLE accounts for disability-related expenses.

Taxpayers, beneficiaries, and administrators of 529 and Achieving a Better Life Experience (ABLE) programs can rely on the rules detailed in the Notice until the U.S. Treasury Department and IRS issue regulations that clarify the three changes.

The new regulations will simplify the tax treatment of a special rule added under the PATH Act for a beneficiary of a 529 plan. This is typically a student who gets a refund of tuition or other qualified education expenses. It can happen when a student drops a class mid-semester, according to the IRS and the Treasury. If the beneficiary recontributes the refund to any of his or her 529 plans within 60 days, the refund is tax-free.

The Treasury Department and IRS regulation will stipulate that re-contributions wouldn’t count against the plan’s contribution limit.

The 2017 tax law allows distributions from 529 plans to be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year. These can be for an elementary or secondary (K-12) public, private or religious school of the beneficiary’s choosing.

Another change in that law lets funds be rolled over from a designated beneficiary’s 529 plan to an ABLE account. That type of account is created to pay for disability-related expenses for those who become disabled before age 26 for the same beneficiary or a family member.

Under the new IRS and Treasury regulations, rollovers from 529 plans, and any contributions made to a designated beneficiary’s ABLE account may not exceed the annual ABLE contribution limit, which in 2018 is $15,000. The exception is certain permitted contributions of the designated beneficiary’s compensation.

Reference: Think Advisor (July 30, 2018) “IRS, Treasury to Issue 529 Plan Regs”

Why 529s Are Good for Everyone

Opening an account is simple. It can be done online or by mail, and it takes just $25 to start.

529 plans are a great way to help parents with taxes and college costs. Grandparents, aunts and uncles and anyone who wants to pitch in, can also benefit.

Money treeStarting to put aside money in a 529 college plan when children are very young, is a wonderful way to push yourself to save over an extended period of time, with some added benefits. Your kids get the advantage of having more funds to draw on for college, and you get an investment that grows tax free. It’s a good deal for everyone.

TheGreen Bay Press Gazette’srecent article, “Benefits of 529 college savings plans keep giving,”reports that the state of Wisconsin’s 529 plan is called the Edvest College Savings Plan.

Opening an account is simple. It can be done online or by mail, and it takes just $25 to start.

529 plan contributions help you save more money because your investment grows tax deferred, while they’re invested in the plan. You can select your investments or use age-based options that change, as the beneficiary gets closer to college age. The distributions are tax-free, if they’re used for qualified education expenses.

Note that Wisconsin residents can also benefit from some unique tax advantages and your child still can attend school in another state. Your Edvest 529 plan can be used in any state and even at certain colleges abroad. Some rule changes this year mean that funds can also be used for K-12 school tuition, in addition to college or vocational schools.

Grandparents are also able to create 529 accounts to benefit their grandchildren. If your grandchild doesn’t need the funds for school, you’re allowed to transfer the beneficiary designation to another grandchild or family member.

There are also estate planning benefits to opening a 529 plan. The annual gift tax exclusion is $15,000 for a single person, and Wisconsin’s Edvest plan lets you to give up to five years’ worth of gifts at one time. You could gift $75,000 for a single filer and $150,000 for couples.

New parents may find it hard to imagine their sweet little babies as college students, but those years fly by. Before you know it, you’re packing up the car to take them to their first year at college. Start by saving in a 529 account soon after they’re born and invite other family members to also participate.

Reference: Green Bay Press Gazette (July 13, 2018) “Benefits of 529 college savings plans keep giving”

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