27 November 2022

How 529s Can Fit Into Estate Planning

Share This Story

We again asked experts to help us answer reader questions on using “529” college-savings plans and other methods to pay for education.

How does a 529 fit into estate planning? 

“When you contribute to a 529 savings plan, you specify that gift is allocated only for education, while also lowering the taxable value of your gross estate,” says Danae Domian, a principal at brokerage firm Edward Jones in St. Louis.

The estate-planning aspect of 529 funding is less of an issue than it was before the latest federal tax bill, says Jim Mahaney, vice president for strategic initiatives at Prudential Financial. Now the lifetime exemption for gifts is $11,181,000 for each person, double that for a couple, in 2018, and it’s slated to rise with inflation. If your estate is set to be higher than this amount, you and your spouse can still give the annual amount of $30,000 to each 529 beneficiary without it counting toward your lifetime exemption, he says.

A stock-market pattern could explain why gains are a struggle now—but will be easier after the election.

The chief benefit of a 529 as part of an estate plan is that it locks up the funds so that your beneficiaries must use them for educational purposes. That is important to many grandparents, Mr. Mahaney says. “The combination of soaring college-education costs coupled with a desire to assist grandchildren with having college options and lower amounts of student debt postgraduation likely means more grandparents will look into 529 plans going forward,” he adds.

One key benefit of 529s is that you can contribute up to five times the annual gift exclusion in one year without incurring any gift taxes, if you note this on your gift-tax returns after making this gift, and you don’t give this beneficiary any more money for five years, Ms. Domian says. This means that a couple filing jointly could give $150,000 to each of their five grandchildren, “removing $750,000 from their estate in just one year,” she says.

Are we allowed to transfer money between our three grandchildren’s 529 accounts, for instance from Tommy to Susie? 

One of the benefits of 529s is that you can switch the beneficiary on an account to any close relative of the original beneficiary. When Tommy is done with school, Grandma can change his account so that his sister (or cousin) Susie is now the beneficiary, Mr. Mahaney says. A person may have multiple accounts, so if Susie already had an account for herself, it’s no problem for her now to also have the account that was Tommy’s (subject to lifetime contribution limits, which are typically in the hundreds of thousands of dollars).

A caveat: This is allowed only if your 529 is set up as an individual account.

“Some 529 plans are set up as custodial accounts, which means the owner made an irrevocable gift to the beneficiary, and therefore, the beneficiary cannot be changed,” Ms. Domian of Edward Jones says.

I have been told that moving money from a minor’s UTMA account to the same child’s 529 account is a liquidation and subject to tax. Is this true? 

“Because the original contribution was an irrevocable gift to the minor, the money in the UTMA would be moved to a Custodial 529 Plan—versus an Individual 529 plan where the account owner retains control for the life of the account,” Ms. Domian says. Under a custodial plan, the adult account owner administers the account until the minor reaches termination age under state law, just as with an UTMA account.

Before making the transfer, you’ll have to liquidate any securities held in the original UTMA account, because contributions to a 529 must be in cash, she says. This liquidation may trigger tax for the minor.

“However, the potential tax benefits of a 529 plan could outweigh the short-term impact of liquidating an UTMA account,” Mr. Mahaney says.

Once the money gets into the 529, its growth won’t be taxed if the proceeds are used for qualified educational expenses.

Click here for the original article from The Wall Street Journal.

Join Our Online Community
Join the Better Way To Retire community and get access to applications, relevant research, groups and blogs. Let us help you Retire Better™
FamilyWealth Social News
Follow Us