Cary Education

Money Matters: 529s and Estate Planning: What’s the Connection?

Editor’s Note: Briant Sikorski from Stratos Wealth Partners in Cary contributed this article.

Cary, NC – Assets in 529 plans have grown significantly in recent years due to their college planning potential. But there’s another side to 529 plans that may appeal to you – potential estate planning benefits.1

Money Matters

First, a Few Basics

To understand how a 529 college savings plan may complement an estate plan, it’s important to start with a basic review of how a 529 plan works. A 529 plan is a college investment program sponsored by a state government and administered by one or more investment companies. The underlying investment options typically are mutual fund portfolios – “age-based” asset allocations that become more conservative as the beneficiary gets closer to attending college or static portfolios with predetermined allocations that remain consistent over time.

Note that the principal value of an “age-based,” or “target date” fund, cannot be guaranteed at any time, including the target date, and may decline at any time. The target date in the fund is the approximate date when an investor plans to start withdrawing money.

Withdrawals are federally tax free (and state tax free in many cases) as long as they are used to finance qualified college expenses. Nonqualified withdrawals are subject to ordinary income taxes and a 10 percent additional federal tax. Eligibility to contribute to a 529 plan is generally not restricted by age or income.

The Estate Planning Angle

For tax purposes, a contribution to a 529 plan is considered a completed gift from the contributor to the beneficiary named on the account. A contributor, therefore, can potentially reduce the size of his or her taxable estate using a 529 plan. You may contribute up to $14,000 per beneficiary annually – $28,000 per beneficiary if you contribute jointly with a spouse – without triggering the federal gift tax. So, if you have three grandchildren, for example, and you maintain a 529 plan account for each one, you could remove $42,000 a year from your taxable estate, or $84,000 if you make the contributions jointly with a spouse.

If you want to reduce the size of your taxable estate more quickly, the IRS permits you to make five years’ worth of gifts in a single year as long as you do not provide additional gifts to the beneficiaries for the remainder of the five-year period. In other words, you can accelerate your contributions and gift $70,000 per beneficiary as an individual or $140,000 per beneficiary if done jointly with a spouse. Keep in mind, however, that if you use this strategy, a prorated portion of the contribution may be considered part of your estate if you do not outlive the five-year period.

Regardless of whether you contribute annually or on an accelerated basis, a 529 plan may provide considerable flexibility as part of your estate plan. For example, even though the money in the account is considered a gift to the beneficiary, you maintain control over how it is invested. If the beneficiary does not attend college, you can generally name a new beneficiary who is a relative of the original beneficiary, such as a sibling or cousin.

If you’re grappling with estate planning and college financing decisions that impact a growing family, you may benefit by familiarizing yourself with how a 529 plan could play a role in both of these key areas.

Briant Sikorski is a Wealth Advisor at Stratos Wealth Partners. Photos by Shilad Sen and reynermedia.