Using Your 529 Savings Plan as an Estate Planning Tool

College may be more expensive than ever, and sending your kids to school to earn a career-rewarding degree may feel practically required to compete in today’s economy. Many parents and grandparents struggle to meet the financial burdens involved, and students can often feel forced to take on crushing debts. Even affluent families struggle to keep up. Have you heard of a 529 college savings plan? This valuable estate planning tool may be a solution to covering the costs of college.

The 529 savings plan is a tax-advantaged investment vehicle named for the section of the Internal Revenue Service Code that authorizes it. Such a plan allows for contributions to grow unabated while remaining sheltered from federal income taxes. Withdrawals remain tax-free as long as the monies are spent on qualified higher education expenses, such as tuition, fees, books, equipment, room and board, and certain off-campus living items.

The investment growth, compounded by tax-free withdrawals, can make for a highly beneficial approach to paying for what frequently amounts to a six-figure education experience. These plans, however, can also provide significant estate benefits. When parents and grandparents make contributions, they are essentially making financial gifts that, in many cases, pass free of any gift tax consequences. Plan contributions further provide parents and grandparents with control over how the money is spent while lowering the taxable value of their estates.

It is not unusual for parents and grandparents to worry about how young adults will spend their inheritances, but channeling tax-exempt cash gifts to a tax-advantaged college fund can provide a high degree of assurance that the money will be spent on education. Non-approved expenses are subject to federal and state income tax plus an additional 10 percent penalty on the earnings. If the giver’s estate is at risk of exceeding an estate tax exemption limit, then a long-term 529 gift-giving strategy could reduce or eliminate a sizable estate tax bill.

Current federal tax law allows you to give $18,000 a year to each of as many individuals as you choose without paying federal gift tax. Couples can give $36,000. Accordingly, parents and grandparents can reduce the taxable value of their estates and help their younger loved ones pay for college by making annual 529 contributions up to the tax-free gift limit every year.

For help navigating these issues, please reach out to our office to schedule an appointment.

Law Offices of John Mangan, PA
Palm City – Stuart, FL
CALL: 1 (772) 218-0480

Do you question the need for attorney guidance with so many online resources? Because laws and regulations are complex, and because every person has a lot at risk, more people than ever are seeking professional guidance from an experienced, knowledgeable source. That helps explain the rapid growth of our firm. Whether you happened upon this website by accident or are one of the many referrals we receive from a nearly 15-year collection of satisfied clients, our staff can provide customized estate planning guidance for you. Call us. Our number: 1 (772) 218-0480

Written by: John Mangan, JD, MBA