529 Tax

Section 529 - A Wealth - Transfer Plan

The true estate-planning feature of a 529 plan can be found in a well-- thought-out family wealth-transfer plan. The parents can establish a 529 plan for their child, depositing their combined maximum gift tax-free amount of $110,000 (five-year front-- end loading of the allowable $11,000 per person for each parent).

The account grows in size over the years and remains untouched even when the child goes to college, as the family has other money to meet college expenses. When the child has his own child, the parents change the beneficiary on the account to their newborn grandchild. While simple and artful, the advisor must take care in structuring these transfers and beneficiary changes, as there may be gift tax and generation-skipping taxes to be managed with proper use of available credits.

In a simpler case, parents or grandparents can make annual gifts to college savings accounts in amounts not exceeding the allowable annual gift and generation-skipping exemptions (currently $11,000 per person per donee). These gifts will be treated as completed gifts, thereby avoiding any estate taxation at the time of passing. The tax-deferred growth, followed by tax-free withdrawals for college-while the grantor retains control over beneficial enjoyment-- is a unique benefit of the 529 plans.

A Family Affair

In another example, a family that has a taxable estate even after proper unified-credit estate planning, creates a 529 account for the benefit of each of their children, fully funding each account. By doing so, more than $200,000 of assets can be instantly removed from their estate, as well as the future growth on the assets.

In the future, as colleges savings plans become more popular, revocable and irrevocable trusts will be used to structure ownership of these wealth-transfer plans. This will allow for multi-generational use of these tax-deferred vehicles in a controlled forum. As estate-planning professionals, our role is to continue to listen and advise our clients using every available tool, including the newest one of all-the 529 plan.

529 Tax