Atlanta Financial Blog

529 Plans Simplify Gifting and Estate Taxes

Julianne F. Andrews, MBA, CFP®, AIF®
December 20, 2018

The 529 Savings Plan, a tax-efficient way to pay for tuition from preschool through graduate school, benefits the plan’s owner as well as its beneficiary. However, state laws complicate their use because 529 regulations vary from state to state. Complications aside, most parents, grandparents, aunts and uncles agree with Benjamin Franklin who astutely observed, “An investment in knowledge pays the best interest.”

Any U.S. citizen or resident alien who is 18 or older can open these tax-favored savings plans whose monies are earmarked to fund education. Even adults can open a 529 plan for their own benefit. However, only one person can own each plan and there can be only one beneficiary per plan. Anyone can contribute to a plan and there are no income restrictions associated with contributions, which makes them attractive to multiple generations.

According to federal law, 529 donations grow tax-free and withdrawals are tax-free as well – as long as they are spent towards a list of qualified educational expenses. However, no state is required to follow these federal laws, and some do not.

The Tax Cuts and Jobs Act of 2017 (TCJA) created a good deal of the confusion about how 529 plans are regulated because each state, including the District of Columbia, sets its own legal mandates. Currently, a majority of 30 states reward 529 contributions with full or partial tax deductions, credits or incentives for contributions to residents who set up accounts in their jurisdictions, while seven states (Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania) offer deductions to 529 plans established in any state. However, seven states, including California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina, do not offer deductions for 529 contributions at all.

What you need to know before you contribute

Because the states regulate these educational funding mechanisms, it is imperative that contributors consult with their financial advisors to fully understand the tax implications before they make their contributions. Here are some tips to keep in mind:

  • While federal law does not cap 529 contributions, all contributions are considered, for tax purposes, as gifts and are combined with the taxpayer’s other qualified gifts against the current annual gift exclusion of $15,000.
  • Contributing more than $15,000 in one year must be reported at tax time. Although no taxes will be due, excess gifts will reduce your lifetime estate exclusion amount.
  • It is possible to put up to five-year’s worth of gifts (currently $75,000) into a 529 plan without impacting the donor’s lifetime estate exclusion amount, although a gift tax return would be required to reflect this. This approach can be an excellent estate tax planning strategy for grandparents as funds put into a 529 plan are outside of your estate. It is a decision that must be carefully considered, however. While grandparents retain control of the funds prior to distribution, withdrawing funds from the 529 plan for purposes other than education can have significant tax implications.
  • Exceeding the $15,000 annual limit or $75,000 five-year cap on 529 donations will not necessarily have estate tax implications down the road. In 2018, the new lifetime exclusion was $11.2 million per individual ($22.4 mil for a married couple).
  • 529 funds can be used to pay for study at accredited colleges and graduate study, as well as professional and trade schools, and international schools with students who receive financial aid. Recipients do not need to be attending qualifying schools full-time to make withdrawals from their 529 accounts.
  • The Tax Cuts and Jobs Act of 2017 changed rules regarding applicable uses for tax-free withdrawals from 529 plans. Tuition for private elementary and high schools can now be paid from 529 accounts each year up to a maximum of $10,000.

For more information about how 529 plans operate in your state and how creating one could benefit you and your beneficiary, consult your financial advisor at Atlanta Financial Associates.

The opinions voiced in this post are for general information only and are not intended to provide specific advice or recommendations for any individual. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results.

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