Estate Planning and 529 Plans

The usage of 529 plans is growing substantially. While for years, many families relied on these plans to fund college, these plans are also capable of being utilized to manage wealth, minimize taxes, and make multi-generational gifts. 


This article takes a brief examination of the advantages as well as limitations that 529 plans can provide. 


Avoid Gift and Estate Tax Rules


If an individual gives away money or assets during their life, they are at risk of being subject to the federal gift tax. The federal gift tax often only applies if an individual gives someone more than the amount excluded from the federal tax amount. For 2019, this amount is $15,000. 


A person is also afforded an “applicable exclusion amount” which exempts approximately $11 million for total lifetime gifts. Contributions that are made to a 529 plan are treated under the federal gift tax rule as completed gifts and qualify for the federal gift tax exclusion. This means that an individual can contribute up to $15,000 without facing any federal gift tax.  


Lump Sum Contributions

One of the most substantial advantages of section 529 plans is that they offer special gifting features. A person is able to make lump sum contributions to 529 of up to five times the annual gift tax exclusion and then spread this amount over the following five years to avoid the federal gift tax. 


This assumes that an individual makes no other gifts during this five year window. If a person contributes greater than five times the amount, only the amount that is greater than the federal gift exception will be taxed. 


Grandparent Gifts


Another advantage of 529 plans involve federal generation skipping transfer taxes. These taxes are placed on transfer made during an individual’s life and at death to an individual who is more than one generation below. This tax is imposed in addition to federal gift and estate tax. 


Similar to the basic gift tax exclusion, there is an exempted amount. This means that if a grandparent contributes no greater than $15,000 to a grandchild’s 529 account in one tax year, there are no federal taxes placed on the amount. 


If a grandparent decides to contribute greater than $15,000 to a grand-child’s 529 plan, the grandparent can also choose to spread out this contribution over a five year period provided no additional gifts are made during this time. While this can be advantageous, there is also a risk that contributing to a 529 account can impact a grandparent’s Medicaid eligibility. 


What Happens if a 529 Beneficiary Passes Away


If the beneficiary of a 529 account passes away, the terms of the 529 plan will dictate how this is resolved. In most cases, the owner of the account will retain control of the assets. 


In some situations, a 529 account owner might name an alternate beneficiary to receive these assets. Other times, a 529 account owner might withdraw assets from the plan without facing penalties. 


Speak with an Experienced Estate Planning Lawyer Today

529 plans are just one of the various strategies that families can utilize as part of their estate plan. To determine which options work best for you, it is a wise idea to retain the assistance of an experienced estate planning lawyer. Contact Ettinger Estate Planning today to schedule a free initial consultation.

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