I’ve always loved 529 plans as a college saving account, but I recently discovered how they can be used as a key part of your family’s gifting plan (i.e., estate plan), even if you don’t have kids or intend to use the money for college.
1. Pay no estate tax.
The money in a 529 plan, and the growth of that money, is excluded from your estate and not subject to federal or state estate taxes after it’s been there at least three years. You can even front-load five years of 529 contributions for each beneficiary (up to $140,000).
2. Change your mind.
Getting cold feet? You can undo the decision. The 529 plan gift is revocable, albeit at a very small penalty. What if you have unexpected medical expenses, or the high inflation of the ’70s and ’80s returns, and you need some of those funds back? The 529 plan is whispering to you: Gift money to your heirs, lower your income and estate taxes, and don’t worry if you need the money back.
3. Establish a simple trust.
The 529 plan lets you establish what is effectively a trust for future generations without any legal complexities, costs or accounting fees for additional trust tax returns. Instead of, or in addition to, establishing trusts for the next generation, consider the ease for you and your heirs of a 529 plan.
4. Create a legacy.
We all want to be remembered. And there’s something wonderful about providing something as important and priceless as education, rather than simply giving heirs a blank check by way of a bequest or trust fund. For those of us who don’t want to rob our loved ones of their vigor to work and succeed, there’s ample evidence that educational legacies are empowering and motivating to recipients.
The key here is that the 529 plan can be passed down from generation to generation without ever paying taxes as long as future generations eventually use the money for trade school or college. Even if you don’t have children, a 529 plan is a wonderful way to leave money to your nieces, nephews and cousins. Remember that if your heirs don’t go to a post-secondary school or don’t need the money, they can pass the money to future generations.
As college tuitions soar, who knows what it will cost to be educated in 50 years? I am currently overfunding my kids’ 529 plans. This means that my 15-year-old and 11-year-old will have funds left over to pay for their kids’ (and grandkids’) higher education with these plans.
5. Benefit from no contribution limit.
While each state-sponsored 529 plan limits contributions to approximately $300,000 per beneficiary, accounts are allowed to appreciate above that level, and there are no restrictions on the number of state plans you can have or on the number of beneficiaries. For those of us who will likely have a taxable estate (either federal or state), you can actually gift millions of dollars to 529 plans and get all the future growth of those dollars out of your estate.
When I speak with estate attorneys and accountants, most say that the 529 plan is too good to be true. However, they also say that even if the IRS modifies the plan, current participants will most likely be allowed to maintain the benefits.
Additional 529 Plan Benefit
By keeping it simple, saving on taxes and establishing an educational legacy that might benefit your heirs for generations, you’re able to create happiness for those you value most, your family.
