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How 529 College Savings Plans Can Also Act As An Estate Planning Tool

When most people think about 529 College Savings Plans, they immediately see them as a tool to help achieve the goal of saving for college.

While 529 Plans certainly help with such a goal, they can also be quite an effective estate planning tool (if used properly) for parents and even grandparents.

Continue reading on to learn more!

Key Benefits Of 529 College Savings Plans

The most important benefits of saving into a 529 Plan come down to … you guessed it … taxes!

Below is a summary of the tax advantages of saving into a 529 Plan:

  • Tax deductions for contributions into a 529 Plan Every state 529 Plan is going to be different and with that, it is true that not every state 529 Plan allows for deductions on the contributions into their 529 Plan. This is not the end of the world, but if you are in a state that allows tax deductions for contributions, you certainly want to take advantage of that.

  • Tax-deferred growth of the investments within the 529 Plan Just like how retirement plan accounts (401(k), IRAs, etc.), a 529 Plan allows for tax-deferral on any growth or income generated from the investments held within the account.

  • Tax-free withdrawals for qualified educational expenses When the beneficiary of the 529 Plan has expenses related to their education, any funds withdrawn from the account are 100% tax-free. Most educational expenses will fit this qualification, but it is important to check with your specific 529 Plan provider to confirm.

Flexibility Associated With 529 Plans

When it comes to thinking about 529 Plans within the context of estate planning, the biggest characteristic has to do with the flexible nature of 529 Plans.

Ability To Change Beneficiary On 529 Plan Accounts

First off, there is the ability to literally change the beneficiary associated with the account. For instance, if you have a 529 Plan for one child that happens to get a scholarship (and does not need any funds for college), you can change the beneficiary to another child.

Within that same vein, but more on the generational planning side of things, you may have children that all get scholarships and never need the funds that you saved for them in their 529 Plans. If that is the case, you can keep those accounts invested, allow them to grow, and update the beneficiary to your grandchildren.

Multi-Use Of Funds For 529 Plan Accounts

There is also an ability to utilize the funds within a 529 Plan Account for education-related items that are outside of the scope of college.

For instance, the Tax Cuts and Jobs Act (TCJA) of 2017, allows for the ability for families to use 529 Plan funds to pay up to $10,000 in tuition for private schools in grades K-12. Always check with your state’s 529 Plan to confirm.

In addition, the SECURE Act of 2019 also provided more multi-purpose use of funds for 529 Plan owners, such as:

  • Paying tuition and qualified expenses of apprenticeship programs

  • Withdrawing a lifetime maximum of $10,000 to pay down student loan debt

Overall, these key characteristics that allow for so much flexibility point to the 529 Plan Account as certainly being an estate planning tool that could be utilized across multiple generations. Because of the ability to change beneficiaries and achieve different “goals” from the funds, a 529 Plan makes a lot of sense for most households with children and grandchildren.

Superfunding A 529 Plan

For parents or more specifically grandparents that want to help a child have the funds needed for college, it is important to be aware of the “Superfunding” or “Front-loading” approach to saving into a 529 Plan Account.

This is a great estate tax planning strategy to think through and figure out if it makes sense for your financial plan.

In short, the IRS allows a household to contribute as much as $150,000 to a 529 Plan in 2021 if they treat the contribution as if it were spread out over a 5-year period. For a single tax filer, the amount would be up to $75,000.

While the annual gift tax exclusion is $15,000 per individual, essentially the IRS allows you to pre-fund in advance of a 5-year period. If you elect to “superfund”, you simply have to report it on Form 709 for each of the five years.

As an estate-tax planning strategy, a parent or grandparent can shelter a large number of assets from estate taxes and still have control of the funds within the 529 Plan account.

Passing On The Value Of Education To Future Generations

In summary, 529 College Savings Plans are a great investment vehicle to help save for college, but there are also so many more important benefits. Specifically, start thinking more about it as an estate planning tool.

If education is a value of yours, pass it on to your children and grandchildren by utilizing a 529 Plan Account. In addition to passing on the value of education, make sure to also teach your children & grandchildren about financial responsibility and always make time for family money talks.

Financial planning is not just about managing investment portfolios. More importantly, it is about having someone you trust to guide you when the unexpected occurs and to make sure your family has a trusted resource to rely on.

At Abel Financial Management, we are local, family-oriented, and truly independent financial planners with a mission to help you make smart decisions with your money. If you or someone you know faces decisions like these, we invite you to have a conversation with us.

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