How Can a 529 Plan Help With Tax Planning?

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A 529 plan can help you transfer assets to heirs while you are alive.

Having a sizable estate can make tax planning more complicated.

President Joe Biden and the current administration may further complicate matters should they pass new legislation on the exemption threshold and the step-up in basis.

You may need to implement creative strategies to minimize how much the government will get from your estate when you die.

According to a recent Barron article titled “A Loophole Makes ‘529’ Plans Good Wealth Transfer Tools. Here’s How to Use Them,” 529 plans may be useful beyond simply saving for college.

A 529 plan is a useful estate planning tool.
You can help your loved ones and yourself with a 529 plan.

What is a 529 plan?

These plans are offered by most states, but you can choose a plan from another estate.

By funding these accounts with after-tax dollars, the money removed from the account will be free from taxes when used for qualified educational expenses.

What are qualified educational expenses?

These include books, tuition, room, and board.

No, they cannot be used to satisfy a bar tab at the local off-campus watering hole.

In all seriousness, funds may be used for non-qualified educational expenses like study abroad, but they will incur a 10 percent penalty and require the payment of income taxes.

Only what was contributed originally will not be taxed.

Did you know opening a 529 plan has several estate planning benefits?

Unlike an irrevocable trust, you can fund a 529 plan and change the beneficiaries and owners of the account.

Although the owner of a 529 is required to designate a single beneficiary, funds can be transferred between beneficiaries in the same family.

What does this mean?

You can move money from the account for your child to the account for his or her child if you stay below gift tax exclusion limits.

Many states allow you to contribute up to $15,000 per beneficiary per year to a 529 plan.

Because you can contribute an amount total to five years of contributions without triggering a gift tax, couples can contribute up to $150,000 per beneficiary in a single year.

Another benefit of a 529 plan is there is no limit to the number of 529 plans an individual may own.

If you have many children and grandchildren, you can open an account for each and begin transferring money for their education while you are alive.

Doing so means you may be able to reduce your estate to fall under the federal tax exclusion limits while funneling your assets to benefit your family rather than the government.

If you want your 529 plan to benefit multiple generations, you will need to set up provisions for transferring ownership.

If you are arranging to fund plans for grandchildren, you will need to designate their parents as successor owners for when you become incapacitated or die.

Although formerly 529 plans were limited to college expenses, thanks to President Trump they can now be applied to private elementary schools and high schools and accredited institution language classes, cooking classes, and career training.

Again, in an emergency funds can be used for non-qualified expenses, but tax and penalty payments will be due.

Before opening accounts and making contributions, you should review the details for the 529 plan with your financial advisor.

Reference: Barron’s (May 29, 2021) “A Loophole Makes ‘529’ Plans Good Wealth Transfer Tools. Here’s How to Use Them”


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