Statecollege.com’s recent article entitled “Did You Know 529s Are Powerful Estate Planning Tools?” explains that specialized savings accounts, informally referred to as 529s, could be at the top of your list. These accounts have a number of advantages for beneficiaries. There are also benefits for the donors in the high maximum contribution limits and tax advantages.
Special tax rules governing these accounts let you decrease your taxable estate. That might minimize future federal gift and estate taxes. In 2021, the lifetime exclusion is now $11.7 million per person, so most of us don’t have to concern ourselves with our estates exceeding that limit. However, remember that the threshold will revert back to just over $5 million per person in 2026.
Under the rules that govern 529s, you can make a lump-sum contribution to a 529 plan up to five times the annual limit of $15,000. As a result, you can give $75,000 per recipient ($150,000 for married couples), provided you document your five-year gift on your federal gift tax return and don’t make any more gifts to the same recipient during that five-year period. You can, however, go ahead and give another lump sum after those five years are through. The $150,000 gift per beneficiary won’t have a gift tax, as long as you and your spouse follow the rules.
Many people think that gifting a big chunk of money in a 529 means they’ll irrevocably give up control of those assets. However, 529 plans let you have considerable control—especially if you title the account in your name. At any time, you can get your money back, but it will be part of your taxable estate again subject to your nominal federal tax rate. There’s also a 10% penalty on the earnings portion of the withdrawal, if you don’t use the money for your designated beneficiary’s qualified education expenses.
If your chosen beneficiary doesn’t need some or all of the money you’ve put in a 529, you can earmark the money for other types of education, like graduate school. You can also change the beneficiary to another member of the family as many times as you like. This is nice if your original beneficiary chooses not to go to college at all.
In addition, you can take the money and pay the taxes on any gains. Normally, you’d also expect to pay a penalty on the earnings but not for scholarships. The penalty is waived on amounts equal to the scholarship, provided they’re withdrawn the same year the scholarship is received, effectively turning your tax-free 529 into a tax-deferred investment. You can always use the money to pay for other qualified education expenses, like room and board, books and supplies.