When you are contemplating your legacy, you should ask yourself how you can do the most good for your family members. If you have young people on your inheritance list, access to a college education would certainly be a meaningful gift.
Plus, when a youngster knows that they have a clear pathway to a bright future, they will invariably motivated to do well during the preparatory years.
All of the above may sound great, but what’s the best way to develop the resources that you need to provide these opportunities?
529 Savings Plans
A 529 college savings plan can be the best way to go if you want to pave the way toward higher education. The structure is similar to the way that Roth individual retirement accounts work.
You establish the account and you name your future college student as the beneficiary. Contributions into the account are made after you pay taxes on the income, and the growth is not subject to taxation.
When the student reaches college age, they can use the assets in the account to pay for tuition, books, fees, room, and board. The maximum contribution limits vary, but they are in the range of $235,000 up to $500,000.
The original beneficiary can be changed to another family member, so if the first beneficiary does not use all the money, you can just change the beneficiary.
There are two different varieties of these 529 plans. With the pure savings plan, the assets can be used to attend any accredited institution of higher learning.
There are also 529 prepaid tuition plans that are appealing to some people. You pre-purchase in-state university credits at a locked-in rate. This gives you maximum bang for your buck, because the costs will inevitably rise year-by-year.
Of course, the student would not have the same flexibility, so there is a certain give-and-take involved with the prepaid tuition plans.
The 529 plan has traditionally been limited to higher education, but this changed when the Tax Cuts and Jobs Act was enacted in December of 2017. Since then, funds in the account can be used to pay for K-12 education as well. However, there is a limit of $10,000 per child, per year.
Early Withdrawals
Another nice thing about these accounts is the fact that your hands are not tied if you decide to use the money for another purpose. You can take withdrawals from the account, but you would have to pay a 10 percent penalty, and the earnings would be subject to taxation.
Estate Tax Efficiency
If you are exposed to the federal gift and estate tax or the state level estate tax, the value of your estate would be reduced by the contributions that you make into 529 accounts. You can use the annual $15,000 per recipient federal gift tax exclusion to contribute this much tax-free each year.
A married couple can combine their respective annual gift tax exclusions to contribute as much $30,000 per year for each beneficiary.
Attend an Upcoming Webinar
We are offering some webinars in the near future that cover estate planning and nursing home asset protection. This is a great opportunity to invest some free time wisely, and these webinars are offered free of charge.
You can see the schedule if you visit our webinar page, and when you pinpoint the session you would like to attend, follow the simple instructions to reserve your spot.
Need Help Now?
If you are ready to work with an attorney to put an estate plan in place, our doors are open. We can gain an understanding of your situation and help you devise a strategy that is ideal for you and your family.
You can set the wheels in motion if you send us a message through our contact page, and we can be reached by phone at 585-374-5210.
- FAQs for People Without an Estate Plan - January 20, 2022
- Tax Planning for 2022 - January 19, 2022
- Alzheimer’s Care Tips: Get the Help You Need - January 18, 2022
