Estate Planning with 529 Plans

We're going to let you in on a little secret when it comes to Section 529 plans. Not only are they an excellent way to fund a child's future college expenses, but 529 college savings plans are also an important estate planning tool. In fact, for wealthier families, a 529 plan offers excellent opportunities to transfer wealth as part of your overall estate plans.

529 Plan Rules

Today, all 50 states and the District of Columbia now offer 529 college savings plans. Also known as qualified tuition programs, they are tax-advantaged investment opportunities operated by the state's treasury office. And one of the most appealing features of these 529 plans is that you don't even need to live in a particular state - or send the beneficiary of the plan to college in that state - to participate in a state's program.

Additional Resources

In fact, the competition among states has lead to extremely generous contribution limits - which is very good news for estate planners. These types of plans are also quite simple when it comes to investment options. With contributions being pooled and managed in one of just a couple of ways: age based portfolios or what are called fixed portfolios.

Age Based Portfolios

With age based portfolios, the money in the 529 plan account that is invested in equities declines as the beneficiary approaches college age. By moving the account dollars away from equities over time and into income producing securities such as bonds, the overall risk of the portfolio is reduced.

Fixed Portfolios

With fixed portfolios, the account balance is invested in a fund that provides a static approach to the investment mix over time. For example, a fixed portfolio might be a growth portfolio, with 100% of the investment in stocks. On the other hand, a fixed portfolio could also be a balanced fund. In a balanced fund a fixed percentage of the investment would be in stock and a fixed percentage in bonds.

Estate Planning

So what exactly are the features of these 529 college savings plans that are so attractive from an estate planning perspective? Well, for one thing unlike education IRAs there are no income limits. That means virtually everyone qualifies as an account holder for a 529 plan - but there's even more good news.

Tax Free Gifts

Another nice feature of 529 plans is their ability to allow the wealthy to reduce their estate tax bill by taking advantage of $12,000 in annual tax free gift contribution. For married couples you can contribute up to $24,000 for each beneficiary in a single year without federal gift tax consequences.

If you're trying to catch up, or simply accelerate the reduction in the size of your estate, you can also fund five years worth of gifts by contributing up to $60,000 ($120,000 for married couples) in the first of a five-year period. Contributions of this size can go a long way in reducing the size of your estate and therefore eliminating estate taxes.

Controlling 529 Accounts

With 529 plans the account owner always remains in control of the plan's assets. Even though the contributions are considered completed gifts, and therefore outside of the donor's estate, the donor does remain in control of the money - not the beneficiary.

Under the Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act (UGMA/UTMA) the beneficiary takes control over the assets once they turn 16, 18, 21 or 25 - depending on the state's rules. In contrast, with Section 529 plans the beneficiary has no control over the money during the donor's lifetime. In fact, the donor can reclaim the money for themselves at any time and for any reason.

Even with all of this control over the account, it still remains out of the donor's taxable estate for estate tax purposes. That's just another of the many great benefits of a 529 plan.

Rollovers and Beneficiaries

Even though most plans also cover graduate school expenses, some states do impose age restrictions. For example, the funds in an account need to be distributed to the beneficiary by the time the student reaches a given age.

You can also move the money in an account around quite easily through 529 rollovers or simply by changing the beneficiary. If you're planning on quickly distributing your estate, you can provide for anyone that falls into a broadly defined term of family. This includes in-laws, stepchildren, aunts, uncles, brothers, sisters, cousins, children and grandchildren

To summarize, Section 529 plans can play an important part in anyone's estate planning strategy. The generosity, flexibility and control are simply unmatched in that regard. Finally, the account holder can also feel good about the gift they are providing the beneficiary - the gift of a college education is something that can never be taken away.

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