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Home » Estate Planning » 529 Plans – Gifts with a Goal

529 Plans – Gifts with a Goal

September 29, 2010Estate Planning

A 529 plan is a tax-advantaged savings plan designed to encourage savings for future college costs. 529 plans, also called qualified tuition plans, are sponsored by states, state agencies or educational institutions. There are two types of 529 plans, pre-paid tuition plans and college savings plans. We will focus on the 529 college savings plans and how they can reduce your taxable estate.

A 529 account, named for Section 529 of the IRS tax code, allows you to reduce your taxable estate while setting aside funds for the higher education of a child, grandchild or any other family member. Funds contributed to a 529 account are invested to pay for qualified expenses, such as tuition, room and board, or other education-related expenses. The earnings from these accounts are now tax-free, while prior to 2002 they were considered taxable income for the beneficiary, even when used to pay for college expenses.

Earnings in 529 plans are not subject to federal tax, and in many cases state tax, as long as the beneficiary uses withdrawals for eligible college expenses. However, if the beneficiary withdraws money from a 529 plan and does not use it on an eligible college expense, they will be subject to income tax and an additional 10% federal tax penalty on earnings.

529 accounts can be a quick way of getting a sizable amount of money out of your taxable estate. While the gift tax exemptions follow the IRS annual guidelines of up to $13,000 per person or $26,000 annually for a married couple, a 529 account offers an alternative $65,000 contribution to be made up front to cover a five year period.

Although a 529 plan for college savings may be state sponsored, the plan chosen does not affect which state the student enrolls in, nor the college chosen. You may also invest in a plan outside your state of residency. This is a major difference between the college savings and pre-paid tuition plans, but on the down side, the college costs are not locked in as they are with a pre-paid tuition plans.

An estate planning attorney can advise you if a 529 college savings plan would benefit your particular situation. Giving the gift of education and reducing your taxable estate may just be a win/win for your estate plan.

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Michael Robinson, Estate Planning Attorney
Michael Robinson, Estate Planning Attorney
Clients notice Michael Robinson’s unique approach to his estate planning practice the minute they walk through his office doors.
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