The Benefits of Tax-exempt Institutional and State-sponsored Contribution Plans

The desire to ensure that grandchildren receive a high-caliber education can now be met with transfer of a 529 plan contribution fund to an estate or trust. Internal Revenue Service (“IRS”) 26 U.S. Code, Section 529 is the federal statutory rule guiding 529 plan tax-exempt transfer of individual investment contribution accounts. An extension of the “generation-skipping” legislation within federal and state tax laws, education funds are a popular estate planning tool that allows family elders to set aside funds earmarked for their grandchildren’s college tuition and expenses.


What is a 529 plan?

Investment contribution funds, 529 plans are state and education institution sponsored programs. An investor can elect a tax-advantaged savings plan or prepaid tuition plan to secure tuition rates to fund a child or grandchild’s college expenses. 529 savings plans allow participants to make cash contributions, and tax-free withdrawal of principle and earnings for “qualified expenses.”


The federal Tax Cuts and Jobs Act of 2017 (“TCJA”) now allows 529 Plan contributors to set aside finance for private elementary and high school tuition and expenses, rather than solely college and university related expenses. Prior to the enactment of TCJA, tax-free earnings from investment contribution plans for education were limited to the Coverdell Education Savings Account (ESA).


In general, the Coverdell ESA were less flexible as an estate planning tool for families. With the new tax plan, they are coterminous. The ESA limits amounts for K-12 tuition and expenditures to $10,000 per year per student. Any remaining funds held in an existing Coverdell ESA account can be rolled over, however. The 529 plan presents a tax-free solution to rollover.


Implemented as an IRC tax rule in 1997, the tax-free designation of funds to 529 plan accounts has grown exponentially since the law’s inception. By Q3FY17, Section 529 plans had amassed to $282 billion in assets. Initially intended for parent-child transfer of funds to tax-exempt investment accounts, 529 plans are a flexible option that also allows for an estate holder to shelter those assets as part of a living trust transfer.

Why a 529 plan estate plan?

A key benefit to a 529 plan versus the Coverdell ESA is transferability. Original beneficiaries may transfer designated funds to another named beneficiary. Growth calculus of 529 plans is in perpetuity, so funds never have to be used if transferred. Funds must be used by beneficiaries of 529 plan college funds by the age of 30 years old, however.


Federal estate law rules for gifts and generation-skipping transfers (GSTs) up to $15,000 for individuals and $30,000 couples protect estate holders and recipients from taxation without using lifetime exemption amounts. The IRS assigns “completed” status to 529 plan transfers for tax purposes. Therefore, contributions made to a 529 plan are considered eligible for exemption from annual tax reporting by an estate and its beneficiaries.


Due to the fact 529 plans only accept cash contributions, securities and other convertible assets cannot be applied to an account. Overall, 529 plans offer better control over distribution, shielding assets from estate taxes. Account fees may be higher than applied to other similar investment vehicles. Consult with a professional estate planner to find out how a 529 plan will contribute to your family’s future.


New York Estate Law Firm

Ettinger Law Firm is a licensed New York attorney practice specializing in estate planning and probate litigation. Contact Ettinger Law Firm to schedule a consultation about an estate law matter.  

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