There are many options you can choose when you are looking for estate planning tools. However, one that you may not think about often is a 529 account. This is because it is mostly known as a way to save for college. However, they are actually pretty versatile because you can transfer the assets to anyone of your choosing, even yourself, to spend on furthering the education of said beneficiary. Beyond that, they can be a very powerful estate planning tool if you are trying to set some money aside for the next generation.
If this is one of your goals, then you should look into a 529 account, which is a specialized savings account. Not everyone has the opportunity to save money for future generations but if you are lucky enough to be able to do so, do not overlook this type of account. Not only does a 529 have many benefits for the beneficiaries of the account but also for the ones that are funding it. This is because there are high maximum contribution limits which include some tax advantages. The biggest advantage is that there are special tax rules that allow you to lower your taxable estate. This, in turn, will allow you to minimize your estate taxes and even future federal gift taxes. Currently, the federal gift tax is not a concern for most people since the lifetime exclusion is $12.06 million per individual but a new threshold of $5 million will be implemented in 2025 which should be accounted for in your strategy if you plan to gift more than that to any beneficiary. Modern estate planning is constantly changing but staying on top of your options, like a 529 plan, can help you to achieve your goals while lowering your taxable burden.
Understanding the 529 Plan
If you have not heard of this before, you may be asking yourself, "What is a 529 plan?" It is essentially an investment vehicle used for education purposes. There are specific rules that govern 529s which outline how you should be strategizing to take advantage of them. Right now, you are allowed to make a lump sum contribution to the fund that is equal to 5 times the annual limit of $17,000. This translates to $85,000 for individuals per year. It actually increases to $170,000 for married couples. When you do this, you will need to claim your five-year gift on your federal tax return and cannot make any more contributions or give any monetary gifts to that individual for a 5 year period. Once that five-year period has passed, you can then make another lump sum contribution to the 529. The benefit for your beneficiary of contributing in one lump sum is that the funds have more time to compound. The benefit for you is that the gift is not eligible for the gift tax because you placed the funds in a tax-sheltered account, the 529. This also effectively lowers your future estate tax penalties as your taxable estate amount will go down with the contribution and the contribution is considered a gift to your beneficiary.
Other Benefits of Using a 529 for Estate Planning
There are many 529 estate plan benefits. While you are contributing funds to the plan, you do not give up control of those assets. While the account is in your name, you have control of how the funds are invested. You also can get the money back at any time, which is why it is always a great idea to have one 529 account with the title in your name. However, if you do take the money out, it would then become a part of your taxable estate but it does give you some flexibility on how the funds are used and gives you some liquidity. You will also need to pay a 10% tax penalty on top of the federal tax rate you are subject to but you will only have to do this for any earnings on top of the amount you put into the account originally.
Another area of concern is if the beneficiary does not want to use the funds for education. They may have gotten a scholarship or maybe they choose not to attend school. However, there are several options that you can consider in this situation:
- The funds can be used for other education, like graduate school or technical school.
- The beneficiary of the account can be changed to another individual. There is no limit on how many times this can be changed and there is no time limit to withdraw the funds so even if you want to defer the funds to another generation, you can do that with no problem.
- The money can be withdrawn and you can pay the taxes on any gains. There is one exception on the taxes and that is if the beneficiary gets a scholarship. The tax penalty will be waived equal to the amount of the scholarship. However, the funds must be withdrawn in the same year the funds from the scholarship are received. In this case, the funds then become a tax-deferred investment for your beneficiary.
- The funds can be used for other qualified education expenses. These include room and board, meal plans on campus, books, and several other items. College is expensive and you should take into account more than just the cost of tuition when thinking about how these funds can be used by your beneficiary.
Within your 529 plan, there are several investment choices you have available. Just like with other savings accounts, like retirement accounts, you can diversify your portfolio by choosing different allocations of asset classes. There may even be some portfolio options that are based on age and how aggressive or non-aggressive you would like the portfolio to be.
Saving for college can be very difficult and if you are able to do so with excess funds, a 529 plan is a great estate planning tool that you can use to your advantage. It can also greatly benefit your beneficiary and change the course of generational wealth. You have many options for your tax-advantaged accounts and you should not count out a 529 for estate planning. We can help you with your options here at Brockmeier Financial as well as walk through how each of those options could be beneficial for you. If you are looking to maximize your tax benefits and minimize your taxable estate, please reach out to us to set up some time for a free consultation.
Any opinions are those of Brockmeier Financial Services, LLC, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of the strategy selected.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover education costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.