529 Plans: Give College Funds and Reduce Your Estate

Many Americans hope and dream that the children and young relatives they cherish will be able to reach their full potential and achieve a measure of success. They probably also realize that a college education can help. In fact, the 2000 census revealed that adults with a college degree earn nearly twice as much as those with only a high school education.¹

Did you know that you can give financial aid to college-bound family members, eliminate gift taxes, and remove the money from your taxable estate — all with one thoughtful donation? If this sounds attractive, you may want to consider contributing to a 529 savings plan.

529 Features
Designed to help families save for college expenses, 529 plans became even more advantageous in 2002. Funds invested in savings plans grow tax deferred, and withdrawals for qualified higher-education expenses are tax-free.² A student is named beneficiary of the account, but a responsible adult maintains control of the assets. And if a beneficiary receives a scholarship or chooses not to attend college, the assets can be transferred to another relative, including siblings or cousins.

Funds donated to a 529 plan are treated as gifts to the beneficiary, so you can contribute up to $11,000 ($22,000 for a couple) annually per beneficiary without paying any gift tax. If you are financially secure and want to give more, you can use five years’ worth of annual gift tax exclusions by making a single contribution of $55,000 ($110,000 for a couple), as long as no other contributions are made for that beneficiary for five years.

Even better for your estate plan, assets contributed to a 529 plan are removed from your estate, which could possibly reduce your estate tax burden.³ Of course, as with other investments, there are fees and expenses associated with participation in a 529 savings plan. In addition, there is the risk that the plan investments may lose money or may not perform well enough to cover college costs as anticipated.

A 529 plan lets you invest for the sake of a child you care about. And a college education is an investment that returns personal and financial dividends for a lifetime.

1) CNN.com, August 8, 2001
2) Current tax law provisions that allow qualified tax-free withdrawals will expire on December 31, 2010, unless Congress acts to extend them. If the funds are not used for qualified education expenses when withdrawn, they are taxable to the account owner. Typically, there is an additional 10 percent federal tax penalty. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. You may want to discuss the tax implications of 529 plans with your tax and/or legal advisors because they can vary significantly from state to state.
3) If the donor makes the five-year election and dies during the five-year calendar period, part of the contribution could be returned to the donor’s estate.

© 2002 Emerald Publications

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