529 Plans

529 plans are tax-advantaged programs that help families save for qualified higher education expenses associated with college. How are 529 Plans helpful for estate planning? Well, contributions to a 529 Plan can help you reduce the taxable value of your estate, if that is a concern.

Estate Planning Considerations

Contributions to a 529 Plan, together with all other gifts from the account owner (the person(s) contributing the money) to the beneficiary (the student), can qualify for an annual federal gift tax exclusion of $13,000 per donor, per beneficiary. If an account owner’s contribution to a 529 Plan account for a beneficiary in a single year exceeds $13,000, the account owner may elect to treat up to $65,000 of the contributions, or $130,000 for joint filers, as having been made over a period of up to five years for federal gift tax exclusion.

Keep in mind that investing in a 529 plan will generally reduce a student’s eligibility to participate in need-based financial aid. As of July 1, 2006, assets held a 529 plan are treated as parental assets in the calculation of the expected family contribution toward college costs.

Types of 529 Plans

There are two types of 529 plans:

• State-sponsored college savings plans. The value of these plans fluctuates with the markets. They can be used at eligible public and private colleges nationally and some colleges abroad. Some state plans offer state tax advantages in addition to federal tax advantages. Qualified higher education expenses typically include: tuition, mandatory fees, books, supplies, and equipment required for enrollment or attendance; certain room and board; and certain expenses for “special needs” students. Currently, 49 states and the District of Columbia have college savings plans.

• State-sponsored prepaid plans. These plans are designed to allow parents to lock in today’s tuition rates at eligible public and private colleges or universities. Qualified higher education expenses typically include tuition and fees at in-state colleges and universities. Some have provisions to include room and board. Currently, only 13 states offer prepaid plans.

Who and Where

With all 529s – both savings and prepaid programs – there is no income or age limit for participation. You can even open an account for yourself.  Any U.S. citizen or resident alien, including the account holder, can be the beneficiary; the only requirement is that the beneficiary must have a valid Social Security Number or taxpayer identification number. Residents of any state can invest in any state’s 529 Plan; you do not have to be a resident of a particular state to invest in that state’s plan.

How Much

There is no annual limit on the amount you may contribute. However, there is an overall maximum account balance limit of $235,000 which applies to all accounts opened for a beneficiary. An account owner may contribute to a beneficiary’s account if, at the time of the contribution, the total balance of all accounts for that beneficiary does not exceed $235,000. Accounts that have reached the Maximum Account Balance Limit may continue to accrue earnings.

Changing Beneficiaries

You can change your beneficiary at any time, or transfer a portion of your investment to a different beneficiary. The new beneficiary must be a member of the previous beneficiary’s family. A “member of the family” of a Beneficiary is a person related to that Beneficiary as follows:

1. a son or daughter, or a descendant of either;
2. a stepson or stepdaughter;
3. a brother, sister, stepbrother or stepsister;
4. the father or mother, or an ancestor of either;
5. a stepfather or stepmother;
6. a son or daughter of a brother or sister;
7. a brother or sister of the father or mother;
8. a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law;
9. the spouse of the Beneficiary or of any of the other foregoing individuals; or
10. a first cousin of the Beneficiary.

For this purpose, a child includes a legally adopted child and a brother or sister includes a half-brother or half-sister.

Transfer of funds or a change in beneficiary is subject to the Generation Skipping Tax (GST) if the new beneficiary is two or more generations below the prior beneficiary. If a transfer is subject to GST, tax is imposed on the prior beneficiary.

As always, for more information, consult a financial advisor, estate planning attorney, or accountant and review: http://www.collegesavings.org/index.aspx