College-Savings Plans - A Godsend For Many
College-savings plans have changed how gifts can be made to future generations. In 1996, IRS Code Section 529 became law, creating a tax-advantaged way for families to save for college and college-related expenses, Section 529 and these 529 plans allow for the investment of money on a tax-deferred basis, with tax-free withdrawal if the invested funds are used for qualified higher education expenses (IRS Section 529 (c)). For the first time, clients can invest money without any taxation, and can withdraw it tax-free if they are using it for college and related expenses.
The college-savings plan (529 plans), a new financial planning tool, may become the single most popular wealth-transfer vehicle available to American families. In 1996, IRS Code Section 529 became law, creating a tax-advantaged way for families to save for college and college-related expenses, Section 529 and these 529 plans allow for the investment of money on a tax-deferred basis, with tax-free withdrawal if the invested funds are used for qualified higher education expenses (IRC Section 529 (c). For the first time, clients can invest money without any taxation, and can withdraw it tax-free if they are using it for college and related expenses. Planning opportunities As with many laws, it is only with time that its true impact can be understood. Even at this early point in its life, Section 529 has generated a myriad of planning opportunities that have never been considered. Beyond the bounds of college savings, these plans give a family the ability to transfer wealth from generation to generation, free of income, estate and gift taxation. They also allow colleges and universities to provide a tax-free tuition benefit to their employees' children. In addition, 529 plans have changed our most basic understanding of how gifts can be made to children and grandchildren. Consider the couple sitting in your office discussing strategies for making gifts to their grandchildren. Previously, their choices were limited to using some form of irrevocable trust or custodial account as the vehicle to make such gifts. Each has its advantages and disadvantages, but common to both is the loss of control by the grantor. The college savings plan has made the impossible possible. Clients can now make completed gifts for estate- and gift-tax purposes while retaining the right to change who will receive the assets. In fact, the grantor even retains the power to take the assets back, although he must pay a tax penalty for doing so. |