|
COLLEGE SAVINGS FUNDS (SECTION
529) AND THEIR USE IN ESTATE PLANNING
INTRODUCTION:
It was shortly after
the birth of one of my nephews that my sister took me aside and commented
sadly that she had just read an article on the cost of college education
which gave her pause: “It says we have to save four hundred dollars a
month, starting right now, and we should have enough to send him to an
average college when it is time. Eighteen years of savings for four years
of average college!” She looked close to tears and, of course, with the
bills from the hospital and setting up the baby rooms, the plan did not begin
until several years later.
But when it did she
quickly discovered that there are various governmental programs designed
to make saving for that ultimate expense a bit easier and some of them
have definite estate tax benefits. The reader should first review our
article on Wills
and Trusts to understand the basics of estate planning and
the estate tax.
If one creates the
right type of savings program, one obtains not only income tax benefits
but can avoid estate tax on the funds placed in the special account,
labeled a “529 College Saving Plan” based on the Code Section allowing
it. But the plan can provide for more than mere college education, as
discussed below.
SECTION 529
SAVINGS PLAN FOR EDUCATION
The purpose of a
529 plan is to provide funds for a beneficiary's college education. These
plans are a result of the tax bill that was enacted during 2001. Up to $11,000
can be contributed each year to a 529 plan without having to file a gift
tax return. Contributions can continue until the account reaches $250,000.
If a gift tax return is filed, gifts of more than $11,000 may be made
during a calendar year. Note that the life time estate and gift tax
exemption would be used up if that was the case, but also note that each
person has the eleven thousand dollar a year exemption so that a typical
couple could give up to $22,000 into that fund annually with no
estate tax.
What are the income
tax benefits? Contributions are not tax deductible, but the income
from the investments in the 529 plan is income tax free. When the funds
are withdrawn and spent for educational purposes, the withdrawals are
also income tax free. That means that the appreciation on the funds you
contribute are income tax free for all time. Since at seven percent money
doubles in about ten years if invested correctly, this could be savings
of tens of thousands of dollars in income tax alone.
What are the
estate tax benefits? Funds
contributed to a 529 plan are no longer included in the estate of the donor.
If the donor has an estate that is subject to the federal estate tax, the
amount contributed to the 529 plan would constitute a tax savings of
between 40 and 50 percent of the amount contributed. As noted in our
various Newsletters,
the Estate Tax is in the midst of alteration annually and no one knows
what it will be after the year 2010. Nevertheless, it is likely that this
could amount to a significant savings.
USES OF MONEY
What if the
beneficiary decides not to go to college? The donor can change the beneficiary of the
plan as often as is needed. However, the new beneficiary must be a member
of the previous beneficiary's family, which includes children,
grandchildren, brothers, sisters, spouses, nieces, nephews, aunts,
uncles, cousins and in-laws. If you are using a trust to create the plan,
simply provide that the Trustee has the right to select a beneficiary
from among all those people. It would be an odd family, indeed, that did
not at least have one of those people willing to go to college if already
paid for by the fund! What type of education is included? Post
high school education, including undergraduate education, graduate
education, and technical training. The expenses that can be paid
include tuition, room and board, books, and supplies. Note that by
including technical training as appropriate, educational institutions
that are not strictly “colleges” may still qualify.
What if the
funds have to be withdrawn from the 529 plan for an emergency?
The principal that was originally transferred to the account can
be withdrawn without penalty. The income that was earned is
subject to income taxation and a 10 percent penalty.
To begin a 529 plan
you should discuss the matter with your financial advisor, your CPA or
your family attorney. There are also web connections with the search
word, “529 Savings Plan” but it is still a good idea to integrate the
plan into your overall investment and estate planning strategy.
|
