Posted by Dr. Tara
I have three wonderful grandchildren. While some might argue it’s too soon to think about college, with the oldest being 6-years old and the youngest 2, I’m of a generation that believes it’s never too early to plan for the future.
I worked hard all my life, saved money and planned for my retirement. Now, I’d like to see the fruits of my labor and wise investment choices pay off for my grand kids. I’ve spoken with friends and my financial planner (my estate is valued at 2.5 million), but still am not clear on the best way to proceed that factors in the yearly climb of tuition fees and living expenses.
The merits of 529 plans have arisen repeatedly in our conversations, but I’m not sure if it’s the best choice. I want to leave the legacy of a great education to the next generation, but what if some of them decide not to attend college. My wish is for all of them to go, but one never knows what the future holds. What would happen to a saving plan should one or all decide against college?
One of my golf buddies recommended I visit your site in an effort to clarify my savings options. What does 401Kid advise?
Thank you for writing. You ask some great questions. Here are some answers. For families of similar means, 401kid can remove contributions and any future earnings from your taxable estate and maintain control of the money if you are the 529 Plan account owner.
Additionally, there are several gift tax benefits of which you might take advantage. You can give monetary gifts to anyone without owing gift tax, as long as gifts do not exceed annual exclusion amounts. This is true of contributions to a 529 Plan. There is an additional benefit, specific to 529 Plans, that allows you to contribute a large amount of money free of gift tax in a single year.
Annually, you may contribute up to $12,000 per student (or annually up to $24,000 per student if you and your spouse contribute) without being subject to gift tax, or contribute up to $60,000 per student in a single year (or up to $120,000 per student in a single year if you and your spouse contribute) without owing any gift tax.
This is a unique feature of 529 Plans. You will need to file a gift tax return and treat the gift as if it were made in equal payments over 5 years. To avoid gift tax, you should make no additional gifts to the student during that 5-year period. If you spread out your contribution over 5 years for gift tax purposes, a portion of the gift would return to your estate in the event of your death during the five-year period.
A 529 Plan is a great way to invest for future college expenses, but it also offers benefits for estate planning. If your gross estate is valued at greater than the applicable exclusion amount of $2,000,000 for federal estate taxes for 2006, you may be looking for ways to reduce its value in order to minimize or avoid estate tax for the beneficiaries of your estate.
A 529 Plan allows you to remove contributions and future earnings from your taxable estate and maintain control of the money if you are the 529 Plan account owner. This combination of factors is unique to 529 Plans. With other types of accounts, if you maintain control of the assets, the money is considered part of your estate.
Grandparents need to keep the federal generation-skipping transfer tax (GST Tax) in mind when contributing to a grandchild’s 529 account. The GST Tax is a tax on transfers made during your life and at your death to someone who is more than one generation below you, such as a grandchild. The GST Tax is imposed in addition to (not instead of) federal gift and estate taxes. Like the applicable exclusion amount, though, there is a GST Tax exemption, which is $2 million in 2006. No GST Tax will be due until you’ve used up your GST Tax exemption, and no gift tax will be due until you’ve used up your applicable exclusion amount.
A 529 Plan may allow you to invest for future college expenses while you take advantage of estate planning and gift tax benefits. You should talk with your tax or legal adviser for information specific to your tax situation and investment planning. The availability of tax or other benefits may be conditioned on meeting certain requirements. Non-qualified withdrawals are subject to federal and state income taxes and a 10% penalty.
I hope this is helpful and thanks for taking the time to write.