A 529 plan is a college savings plan that is offered by individual states. You contribute assets into the plan and they are invested, similar to the way that a 401(k) plan operates. You name a beneficiary who will utilize these assets to pay for college expenses. If the markets are favorable these assets will continually grow, and this growth is not taxable if the money is ultimately used for qualified purposes.
These plans can be beneficial for those who are looking for estate tax efficiency strategies.
If you are a person of means you may want to take steps to guide your younger family members toward the fulfillment of their own true potential as people. Education is obviously going to be of tantamount importance.
Giving them direct inheritances may be part of the plan, but guiding them toward educational opportunities may be a priority for you.
With a 529 plan assets that you contribute are going to be exiting your taxable estate, and this will provide some estate tax efficiency. The bad news is that these contributions are subject to the federal gift tax. The gift tax is unified with the estate tax, and it carries the same 40% maximum rate.
You can however make contributions that stay within the $14,000 annual per person exclusion. Each person is allowed to give gifts totaling this amount to others during a year tax-free. If you give the $14,000 annually you are incrementally reducing the taxable value of your estate as you are funding the education of a loved one in a tax-free manner.
Paul A. Kraft, Estate Planning Attorney
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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