529 College Savings Plans Can Be Effective Estate Planning Tool
May 29 is National 529 Day! While 529 plans have amassed over $464.3 billion in assets since their inception in 1997, less than 30% of the population is aware that a 529 Plan is a College Savings Plan. Their popularity is on the rise as parents and grandparents realize the favorable tax benefits while also saving for education expenses. Section 529 Plans can act as an effective estate planning tool as well.
Initially intended to provide parents of young children the ability to save and invest money for future anticipated college-related expenses, recent changes in 529 Plans now allow funds to be used for private elementary and high school expenses up to $10k/year, rather than just college-related expenses. The new rules delight both parents and grandparents looking for a better way to pay for private educational costs.
529 Plans offer two primary benefits:
1) Assets grow tax-deferred and are withdrawn tax-free for qualified expenses; and,
2) Contributions made by parents and grandparents are considered a gift, providing estate planning benefits.
Over the years, both wealthy and lower-income parents and grandparents have been the main contributors to these plans. There is no maximum annual contribution, and total contribution limits are usually high and vary by state. Any parent or grandparent can make gifts of up to $16,000 per year, per individual person (child), and to as many individuals as they wish under the annual gift exclusion – contributions in excess of this amount would not be included in the estate tax gift exclusion.
Section 529 plans allow gifts to be made five years ahead, all at once. Thus, a grandparent can gift $80,000 per grandchild at once for the next five years. If the grandparent has five grandchildren, then they have the ability to contribute or gift $400,000 at once to the 529 plans. There would be no gift tax, assuming no other gifts were made to that child over those years, and the donor lives five years after the gift is made. Such generous contributions allow a reduction in the contributor’s taxable estate.
The federal estate tax exemption – the amount an individual can leave to heirs without having to pay the federal estate tax – is $12,060,000 in 2022. So, this is an ideal strategy for parents and grandparents who may have estates valued at over $12 million. Additionally, the state tax deductibility on the front end could be a significant benefit to contributors if allowed by the state. In Ohio, for example, a grantor can deduct $4,000 per beneficiary per year, and the deduction can carry forward. However, Kentucky offers no deductions for residents.
source: JP Morgan
Any money left in a 529 plan after college can continue growing for the next generation, or grow perpetually for future generations. Also, a notable key benefit to a 529 includes transferability. Funds in a 529 account may be transferred from the original beneficiary to another. There are many good reasons families are now using 529 Plans as an estate planning tool, allowing unused funds in a 529 to pass along to future generations.
As always, if you have any questions, please reach out to our professional team. The Madison team can help you establish a 529 Plan account, determine funding amounts, strategy, and investment allocations, and review your plan with you periodically.
Editor’s Note: This post was originally published in 2019 and has been updated for accuracy and comprehensiveness.