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Section 529 College Savings Plans and Estate Planning

January 01, 2015

By: Michael Relvas, CFP®

With the cost of college education continuously increasing, planning for education expenses has continued to play a large role in the overall management of many families’ personal finances. Section 529 college savings plans are one of the most popular options for a number of reasons, including tax-deferred growth and tax-free distributions for qualified education expenses, (not limited to tuition and fees like many other college savings vehicles). In addition, Section 529 plans can also serve as beneficial tools for basic estate planning and gifting strategies.

Estate & Gift Tax Basics

When an individual’s estate is valued over a specific amount, any assets in excess could be subject to Federal estate tax and/or State estate tax. To avoid an estate tax liability, individuals can reduce the value of their estate using a number of methods – one of which is gifting. However, there are limitations which generally limit an individual to gifting $14,000 each year, per donee, without having to use any of their lifetime gift tax exclusion. If gifts are made in excess of the $14,000 per year, and the lifetime gift exclusion has been reached, these assets transferred may be subject to gift tax.

Acceleration of Annual Gift Tax Exclusion

For wealthier individuals interested in reducing the value of their estate, gifting through Section 529 plans can allow for larger, lump sum gifts that still qualify for the Federal annual gift tax exclusion. Unique to Section 529 plans, individuals can gift up to five times the Federal annual gift tax exclusion in a single lump sum, which allows for the transfer of up to $65,000 for an individual donor, or $130,000 for a married couple. In order to receive this favorable treatment, the donor must make a special election on his/her Federal gift tax return that essentially spreads the gift over a 5-year time frame, and must also avoid gifting additional assets to that same donee, within the designated 5-year time frame. The second requirement is that the donor must live beyond the 5-year time frame in order for the full value of the gift to be completely removed from his/her estate. A larger lump sum gift allows for growth to occur outside of the donor’s estate, which can be very important.

Retaining Control

One of the most pressing issues with a gifting strategy is that the donor must give up control over the assets, in order for the assets to be considered removed from the donor’s estate. Unique to Section 529 plans however, the account owner has the ability to make additional contributions to the account, make withdrawals from the account, change investment selections within the account, and change the beneficiary of the account, all while maintaining the value of the account outside of the owner’s estate. Gifting through a Section 529 plan therefore reduces a great deal of concern with giving up full control over the assets without losing the benefits of a gifting strategy.

To further discuss the benefits of Section 529 plans, you can contact Financial Balance Group, LLC at 240-683-9700 or request a consultation.

Michael L. Relvas is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS),1901 Research Blvd, Suite 400, Rockville MD 20850. Securities products/services and advisory services are offered through PAS, a registered broker-dealer and investment advisor, 240-683-9700. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Financial Balance Group is not an affiliate or subsidiary of PAS or Guardian.
PAS is a member FINRASIPC.
Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.