Not only are Section 529 plans an excellent way to fund a child's future college expenses, but they're also an important estate planning tool. In fact, for wealthier families, a 529 plan offers excellent opportunities to transfer wealth as part of an overall estate strategy.
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 accountholders 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.
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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.
Age-Based Portfolios
With age-based portfolios, the money in the 529 plan account invested in equities declines as the beneficiary approaches college age. By moving the account dollars away from equities, and into income producing securities such as bonds over time, the overall risk of the portfolio is reduced and capital is preserved.
Fixed Portfolios
With fixed portfolios, the account balance is invested in a fund that provides a static approach to the investment mix over time. For example, a fixed portfolio might be a growth fund, with 100% of the investment in stocks. On the other hand, a fixed portfolio could also be a balanced fund, which would include a fixed percentage of the investment in common stocks and a fixed percentage in bonds.
Estate Planning
So what exactly are the features of these 529 college savings plans that make them 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 accountholder for a 529 plan. But there's even more good news.
Tax Free Gifts
Another nice feature of 529 plans is their ability to allow wealthy individuals to reduce their estate tax bill by taking advantage of a $15,000 annual tax-free gift contribution in 2020. Married couples can contribute up to $30,000 for each beneficiary in a single year without federal gift tax consequences.
Individuals trying to catch up, or simply accelerate the reduction in the size of their estate, can fund five years' worth of gifts by contributing up to $75,000 ($150,000 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 an estate, eliminating or minimizing estate taxes, and funding a college education.
Controlling 529 Accounts
With 529 plans, the account owner always remains in control of the plan's assets. Even though the contributions are considered completed gifts, and therefore outside of the donor's estate, the donor remains in control of the money, not the beneficiary.
Under the Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act (UGMA/UTMA), the beneficiary takes control over the assets once they turn 16, 18, 21 or 25 years of age; depending on the state's published rules. In contrast, with Section 529 plans, the beneficiary has no control over the money during the donor's lifetime. In fact, the donor can reclaim the money for themselves at any time, and for any reason.
Even with all of this control over the account, it still remains out of the donor's taxable estate for estate tax purposes. These are just some of the many great benefits of a 529 plan.
Rollovers and Beneficiaries
Even though most plans also cover graduate school expenses, some states do impose age restrictions. For example, the funds in an account need to be distributed to the beneficiary by the time the student reaches a given age.
It's possible to move the money in an account by completing a 529 rollover or simply by changing the beneficiary. When planning to quickly distribute an estate, it's possible to provide for anyone that falls into a broadly-defined term of family. This includes in-laws, stepchildren, aunts, uncles, brothers, sisters, cousins, children, and grandchildren
To summarize, Section 529 plans can play an important part in anyone's estate planning strategy. The generosity, flexibility, and control are simply unmatched in that regard. Finally, the accountholder can also feel good about the gift they are providing the beneficiary, since the gift of a college education is something that can never be taken away.
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