The Weekly Scenario: What Are The Benefits of A “529” Plan?
Question: What are the benefits of a “529” plan?
Answer: A 529 plan is an account used to save for educational costs. Named for Section 529 of the Internal Revenue Code, this provision confers tax-free status on qualified tuition programs.
Contributions to 529 plans are not tax deductible on the federal level (but a number of states (Maryland for one) may make contributions tax deductible up to a certain dollar amount). Income earned from investments in a 529 plan account is not taxed while in the account so long as the funds, when withdrawn from the account, are used for qualified education expenses. In other words, earnings on investments in the account are never taxed if used for a qualifying purpose.
Qualified education benefits include college tuition, as well as elementary or secondary private, public or religious school. But also computer technology and related equipment, room and board at an educational institution, books, fees (and more recently up to $10,000 for K-12 expenses).
529 Plans have estate tax benefits as well. In general, when you retain control of assets, those assets will be included as part of your taxable estate. However, in the case of a 529 plan, you can make gifts to a 529 plan to remove assets from your own taxable estate, yet not lose control over those assets.
Contributions you make to a 529 plan may qualify for the annual gift tax exclusion (up to $15,000/year to each recipient); moreover, you may contribute up to 5 years worth of gift exclusions at one time. After five years, the contributions to the plan will not have used any gift tax exclusion and not be included in your taxable estate.
Comment: 529 plans are typically created to benefit children and grandchildren. That being said, anyone can create a 529 plan for anyone else (blood or not blood-related). Contributions can be made up to very high amounts (plan specific).
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
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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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