Finance Friday: 529 Plan – The Often Overlooked Wealth Transfer Tool

Many in the tech industry ramp up their careers and new family simultaneously. As their careers blossom, the focus can change from “making it” to planning for education for kids and eventually navigating the estate tax landscape.

Many of you have heard of the 529 College Savings Plan and the basic tax advantages that these plans provide.  Often times these plans can play a larger role in the overall estate plan of a family. Let’s take a look at some of these added benefits that aren’t always apparent when we think about 529 plans.

As a refresher, 529 plans offer tax free growth on assets that are used for qualified education expenses.  This will typically include tuition, books, fees and sometimes room and board.  If 529 distributions are not used for qualified education expenses, earnings will be taxed as ordinary income and a 10% penalty will apply.  The IRS allows for a $10,000 maximum withdrawal per beneficiary per year if used for k-12 expenses.  Contributions to a 529 are not deductible at the federal level, but depending on the state, may be at the state level.  There are no income limitations, so anyone can contribute.  In addition to the education planning attributes, the 529 offers asset protection benefits from bankruptcy proceedings.

If all this weren’t enough, one of the most unique and advantageous components of a 529 plan is the ability to remove the value from the account owner’s estate while still maintaining control over the assets and beneficiaries.  As the account owner, you make the investment decisions and decide when distributions from the account can be made.  You can even change the beneficiary (within the family) if the funds are not used or needed by the original beneficiary.

The IRS allows you to gift up to $15,000 to as many beneficiaries as you choose annually (or $30,000 per couple) without incurring a gift tax.  However, within a 529 plan, you are able to front load your gift schedule by making a lump sum payment of $75,000 (or $150,000 as a couple) to a 529 plan in the first year of a five-year period.  This could be a great tool to reduce your estate. For example, a couple who has three kids could remove up to $450,000 by gifting $150,000 to each of their 529s.

The 529 College Savings Plan is a simple and efficient estate planning tool that is often over-looked during the estate planning process.  As you consider various gifting and education planning strategies, ask your financial advisor how a 529 plan might make sense for your plan.