Wednesday, July 10, 2013

Q&A Series - Estate Planning and 529 College Savings Plans

Sylvia, a reader with a large estate, is looking for alternative estate planning techniques.

Q: I have been fortunate enough to accumulate a fair amount of wealth in my life. My health has been a concern lately, and I need to reevaluate my estate plan. I have two adult children and six grandchildren. Do you have any suggestions?

Sylvia, I’m sorry to hear about your health concerns. Financially speaking, reevaluating your estate plan at the current time is a smart thing to do, especially if the value of your estate is over the $5.25 million estate tax threshold for 2013 ($10.5 million for married filers).

As an initial suggestion, it’s probably best for you to meet with your tax and financial planner to obtain a tailored strategy that meets your specific needs. We’re happy to help you devise a plan that makes the most sense for your particular asset situation. In the meantime, I’ll go over one estate planning tool that’s been gaining a lot of attention lately (one that Joe Rollins touched on back in early 2011) concerning 529 plans. Considering you have grandchildren, and depending upon the value of your estate, this tool could be especially useful to you.

First, anyone can establish a 529 plan for their child or grandchild – or any other loved one, for that matter – to help pay for college. Doing so not only benefits the designated beneficiary – it also benefits your loved ones because it removes money from your taxable estate, which will help you minimize your tax liability and preserve more of your estate after you die.

We always suggest that the 529 account be established in the contributor’s name, not the designated beneficiary’s because the assets won’t factor into the child’s financial aid application at all if it’s set up this way. This is because the contributing relative – not the parents or the child – “owns” the account, with the child named as beneficiary. Also, the contributor maintains control of the assets if he or she is listed as the account owner.

Here are the basics:

How are contributions to 529 plans treated for tax purposes? Contributions to 529 accounts are treated as federal gifts to the designated beneficiary
This means that you can contribute up to $14,000 per year (the annual gift tax exclusion amount) to the 529 account of any beneficiary without incurring federal gift tax. Keep in mind that state tax treatment may differ from federal tax treatment.

What if you contribute over $14,000 in a year? Section 529 plans offer a special gifting feature which allows you to make a lump-sum contribution of up to $70,000 ($140,000 for married couples) in a year and then spread it evenly over five years to completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period.

How are gifts from grandparents handled? When contributing to someone’s 529 account who is more than one generation below you (a grandchild, for example), it’s important to keep in mind the federal generation-skipping transfer tax (GSTT). The GSTT is a tax on transfers made during your life and at your death to someone who falls under that umbrella, and it is imposed in addition to (not instead of) federal gift and estate taxes. There is a GSTT exemption, however, and it is the same as the basic gift tax exclusion amount ($5,250,000 in 2013). And, your GSTT will not be due until you’ve used up your GSTT exemption. Likewise, no gift tax will be due until you’ve used up your applicable exclusion amount.

There are no federal tax consequences if your contribution to your grandchild’s 529 account is $14,000 or below and you haven’t made any other gifts to your grandchild during the year. If your contribution is greater than $14,000, like the special gifting feature discussed above, you can elect to spread the additional contribution amount evenly over a five-year period. Only the portion that causes a federal gift tax will also result in a GSTT.

What happens if a 529 account owner dies? Depending on the terms of the particular state’s 529 plan, it is possible for a contingent account owner to be named in the event of the original account owner’s death. Alternatively, some states allow account ownership to pass directly to the designated beneficiary.

In any event, if the 529 account owner dies, the account value usually isn’t included in his or her estate, and the value of the account is instead included in the designated beneficiary’s estate. If you made the five-year election, however, and died prior to the expiration of the five-year period, then the portion allocated to the year(s) after your death would be included in your federal gross estate.

You should definitely review your state’s rules so you know how your 529 account may be taxed at your death for state purposes.

What if a 529 account beneficiary dies? You must look to the rules of your 529 plan if the designated beneficiary of the 529 account you own dies, but typically, the account owner still maintains control of the account and he or she would be able to name a new beneficiary or withdraw the assets from the account. In the latter case, the earnings would be taxable, but there would be no termination penalty. Also, bear in mind that the 529 account balance may be included in the beneficiary’s taxable estate.

Sylvia, thanks again for your question. Thoughtful planning now through this powerful estate planning vehicle can help remove a considerable amount of money from your estate while still leaving you in control of your assets. We wish you many happy, healthy years with your loved ones, who will assuredly be grateful for everything – both tangible and intangible – you’ve provided to them.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Eddie Wilcox, CFA

Source: Broadridge Investor Communication Solutions, Inc. – “Estate Planning and 529 Plans,” Copyright 2013

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