529 Plans as an Estate Planning Tool? Yes, That’s Right!

The tax-favored education savings accounts governed by Section 529 of the Internal Revenue Code — 529 plans, for short — have been receiving increased publicity since the Tax Cuts and Jobs Act of 2017 (TCJA) expanded their permissible uses from only higher education–related expenses to include costs for K–12 education, including private schools. Funds deposited in a 529 plan grow tax-free, and withdrawals for qualified expenses — school tuition, books, room and board, and even necessary supplies and equipment like computers — are also free from taxation.

According to a recent article in Barron’s, the plans are receiving a whole new wave of interest from wealthy parents and grandparents interested in the plans’ potential for trimming down the size of their taxable estate. The TCJA allows an individual to pre-fund a 529 plan with five years’ worth of non-taxable gifts, or $75,000. That means that two grandparents, for example, could contribute as much as $150,000 to a 529 plan for a grandchild, and they could do the same for each grandchild. They could then continue to funnel $15,000 per year ($30,000 for a couple) into each plan annually.

Here’s another interesting estate planning benefit of 529 plans: the plan owner (the individual making the contributions) retains ownership of the assets. Unlike some trusts and other estate planning tools, a 529 plan permits the owner to gain the benefit of a completed gift for estate tax purposes while still being in control of the funds. So, suppose that the beneficiary of a plan (typically a child or grandchild) decides not to attend college. The plan owner has the ability to name a new beneficiary, if they so choose. Want to change the way the funds are invested? No problem. You can roll over funds from one plan to another once a year, or even more often if you are rolling funds into a plan with a different family member as beneficiary.

Another interesting feature of 529 plans is that the funds can be rolled into an Achieving Better Life Experiences account (ABLE), a program that promotes savings for persons with disabilities. While this benefit will go away in 2026 unless Congress renews it, this attribute presently offers additional flexibility for parents or grandparents who may wish to make provision for the future needs of a child or grandchild with special needs.

When looking at 529 plans, it’s vital to understand the particular rules for your state. Because each state administers its own plans, rules differ on contribution limits, how much can be withdrawn for certain purposes without incurring state income taxation, and even the types of investments available within the account. Recently, the Financial Industry Regulation Authority (FINRA) issued an investor bulletin, cautioning those considering 529 plans to become thoroughly familiar with their home states’ regulations before setting up or investing in a 529 plan.

If you are interested in learning whether a 529 plan might be a useful way to reduce the size of your taxable estate, or if you’d just like more information on how these plans can provide for the education of the next generation, we can help you find the answers you need.

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