Not only are 529 plans an excellent way to fund a child’s future college expenses, but 529 college savings plans are also an important estate planning tool. In fact, for wealthier families, a 529 plan offers excellent opportunities to transfer wealth as part of your overall estate plans.
529 Plan Rules
Today, all 50 states and the District of Columbia offer 529 college savings plans. Also known as qualified tuition programs, these are tax-advantaged investment opportunities operated by the state’s treasury office. One of the most appealing features of these 529 plans is that you don’t even need to live in a particular state, or send the beneficiary of the plan to college in that state, to participate in a state’s program.
In fact, the competition among states has led to extremely generous contribution limits, which is very good news for estate planners. These types of plans are also very simple when it comes to investment options. With contributions being pooled and managed in one of just a couple of ways: age-based portfolios or what are called fixed portfolios.
So what exactly are the features of these 529 college savings plans that are so attractive from an estate planning perspective? Unlike education IRAs, there are no income limits that restrict, or prohibit, an investor from fully contributing to a plan. That means virtually everyone qualifies as an account holder for a 529 plan. But there’s even more good news.
Another nice feature of 529 plans is their ability to allow wealthy individuals to reduce their estate tax bill by taking advantage of a $13,000 annual tax-free gift contribution. For married couples, you can contribute up to $26,000 for each beneficiary in a single year without federal gift tax consequences.
If you’re trying to catch up, or simply accelerate the reduction in the size of your estate, you can also fund five years worth of gifts by contributing up to $65,000 ($130,000 for married couples) in the first of a five-year period. Contributions of this size can go a long way in reducing the size of your estate, and therefore eliminating or minimizing estate taxes.
For more information regarding Estate Planning or how 529 Plans benefit your estate plan, please call The Singh Law Firm, a boutique Estate Planning Law Firm based in the Bay Area.