You may have heart that a 529 ,“qualified tuition plan,” is estate planning magic and wondered what the advantages are with this planning mechanism. This article will explain what a 529 plan is and why it can be very beneficial as an estate planning tool, with an introduction about 529 plans summarized from https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html.
- What is a 529 plan?
A 529 plan is a tax-advantaged savings plan. It is designed to encourage saving for future education costs. They are known as “qualified tuition plans” and are sponsored by states, state agencies, and educational institutions.
- What are the two kinds of 529 plans?
The two kinds of 529 plans are prepaid tuition plans and education savings plans. With the prepaid tuition plan, the account holder purchases credits at participating colleges/universities for future tuition for the beneficiary. With education savings plans, the saver opens an account for the beneficiary’s future tuition, mandatory fees, room and board. The saver can choose various investment portfolio options to grow the initial investment.
- Why is flexibility one of the benefits of a 529 plan for estate planning?
One of the main benefits of a 529 plan for estate planning purposes is the unparalleled flexibility. The saver can remain the owner of a 529 plan and retain the power to change the beneficiary to a qualifying family member (which includes children, grandchildren, nieces and nephews and others). This is better than another estate planning tool, the irrevocable trust, where the saver cannot act as a trustee and cannot retain the power to change beneficiaries.
- How does the “front load” factor in as a benefit of a 529 plan for estate planning?
The annual exclusion from gift tax allows a grantor to transfer a set amount per year, per person. This amount is $16,000 in 2022 (See https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022)
The saver can make five years of annual exclusion gifts in a single year and use no transfer tax exemption. If the saver is married and chooses gift-splitting, the couple can transfer $150,000 to a 529 plan in a single year and use no estate and gift tax exemption. See your attorney or tax professional for more details as the proper elections must be made to take advantage of this benefit.
CONTACT THE LAW OFFICE OF DAVID KNECHT
If you need assistance with understanding a 529 Plan or estate planning in California, contact the Law Office of David Knecht. We have extensive experience with estate planning and can set up a customized plan that’s right for you and your loved ones. Contact us at 707-451-4502 for more information.
