Estate Planning & Education: How Can a 529 Plan Help You Pay for College?

If you or someone in your family will be facing large school costs — be they private grade school, college, graduate school, or trade school — a 529 plan is a smart way to allocate funds while reducing other tax burdens.

The particularly smart aspect of the 529 is that contributions remove money from the taxable estate of the donor. If you or your financial advisor understand the gift tax rules and estate tax considerations, then you can sidestep estate taxes and other tax liabilities, all while helping funding the education of your loved ones.

Currently, you can give some up to $15,000 in any given tax year without incurring the federal gift tax. If you give more than $15,000 to an individual, then the gift tax kicks in at the federal level. Multiple individuals can each receive, say, $14,900 from you, and no taxes will touch these gifts.

State laws are considerably different, so be sure to study your local laws as they apply to financial gifts.

That said, any contributions to a 529 plan are considered “completed gifts.” Any money you contribute to a 529 is covered under these federal gift tax rules. The 529 is in the name of the beneficiary whose schooling will be funded.

If you want to contribute a large amount in one particular year, there are special features to assist you. Let’s say you had a windfall, and have $70,000 you want to contribute to your granddaughter’s college fund. You can make a lump-sum contribution of up to five times the annual gift tax exclusion — therefore, anything up to $75,000. You choose to spread the gift evenly over the five years, and then you completely avoid the federal gift tax. If you are married, this amount doubles for you and your spouse. You could donate up to $150,000 at once.

How does this type of 529-contribution impact estate planning with regards to end-of-life plans?

If you are the owner of a 529 account, and you die, then the 529 account will not be included in your estate. This account will immediately go to the beneficiary of the 529. If you made the five-year contribution discussed above, then the amount set to be distributed in the years after your death would be in your federal gross estate.

You can set terms in your 529 plan that will name a contingent account owner in the event of your death. If you want to establish it such that the beneficiary does not immediately assume control, then you can place that control in the hands of another designated individual.

One aspect of a 529 plan that is not often discussed is that you, as the owner of the account, have the right to ask for the money back at any time. The money you contribute leaves your taxable estate, yet you essentially retain control of it, by being able to request the money’s return.

This effectively removes any hesitation you may have about the $15,000 annual “gift.” The money you give to a 529 does not irrevocably leave your assets. You may need this money later on for something else, or you may simply just change your mind.

Also, bear in mind that you do not need to invest in your own state’s 529 plan. You can choose another state’s 529 plan which may have lower fees and a better-performing investment portfolio.