The Weekly Scenario: College Savings Plans
Question: Are there estate tax benefits to funding a 529 (“College” Savings) plan?
Answer: Yes, but the estate tax advantage is most apparent in the situation where large lump sum contributions are made.
Contributions to a 529 plan account reduce your taxable estate. For federal gift tax purposes, the contributions are treated as completed gifts eligible for the annual gift tax exclusion of $15,000 (in 2018). This is true even though, unlike most irrevocable gifts, you can choose to take the contributions back (so long as you are willing to pay income tax and penalties). Moreover, you can elect to spread a lump-sum contribution over five years and thereby immediately benefit from five years’ worth of annual federal gift tax exclusions. The election is made on a federal gift tax return.
So for example, a parent or grandparent can make a lump-sum contribution of up to $75,000 in 2018 ($15,000 x 5) to a 529 account set up for a child or grandchild. A married set of parents or grandparents can jointly contribute up to $150,000 ($75,000 x 2) (per child/grandchild). Gifts up to these amounts won’t reduce your federal gift tax exemption for 2018 if you elect to take advantage of the five-year spread privilege. Thus, your $11.18 million federal estate tax exemption will not be utilized.
However, if you die during the five-year spread period, a pro-rata portion of the contribution is added back to your estate for federal estate tax purposes.
In addition to the estate tax advantages, you avoid income and estate taxes on future earnings that would otherwise accumulate from the $150,000 contributed to the 529 account (federal income tax could be as high as 37%) plus applicable state income tax rates.
Tax Cuts and Jobs Act Update:
Beginning in 2018, the Tax Cuts and Jobs Act allows you to take tax-free distributions of up to $10,000 per year from a Section 529 plan to cover tuition at a public, private, or religious elementary or secondary school (previously 529 plans could only be used for college).
As always, if you have any questions or would like to learn more, please let me know.
As always, if you have any questions or would like to learn more, please contact Steve Shane at email@example.com or .
ABOUT STEVE SHANE
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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