Using Your 529 Savings Plan as an Estate Planning Tool

  • Clifford M. Cohen,
  •   Estate Planning
  •   Comments Off on Using Your 529 Savings Plan as an Estate Planning Tool
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Were you aware that many parents use 529 savings plans as a way to let their child’s college funds grow tax-free? These plans, however, may not be just for parents, and they do not have to be used by a specific beneficiary. There are potentially huge benefits to using your 529 savings plan as an estate planning tool, including the ability to gift money to your heirs but still retain control over its use, while removing the funds from your taxable estate.

The annual gift tax exclusion is $15,000 per person per beneficiary. This means that you are allowed to gift $15,000 annually to each of your children or grandchildren without them owing any gift tax. If you are married, you and your spouse are each allowed to give $15,000 per beneficiary, so you can actually exclude up to $30,000 from gift tax on an annual basis. There can be many benefits to making annual gifts to your children or grandchildren. They have the ability to use part of what might otherwise be their future inheritance on education or purchasing a home right now. You do, however, lose control of the money once it is gifted. If you want to be sure your grandchild, niece, or nephew will use the gifted money for his or her education, funding a 529 plan instead may be the way to go.

When you fund a 529 savings plan as part of estate planning, you can put the same $15,000 per year, or $30,000 as a married couple, into the plan, and it will not be subject to estate or gift tax and the growth will be tax-free. Unlike a regular gift, you retain control over the money. It can be used for your loved one’s education, but you have the right to take the money back or change the beneficiary at any time. If you do want to withdraw the money, the earnings are subject to a 10% penalty plus ordinary income tax. If your grandchild decides not to attend college, or wins a scholarship that covers all his or her expenses, and you do not have any other heirs who need to use the funds, you can just leave the funds in the account and pass it on to your grandchild, to use with his or her own children or grandchildren.

For more information on how to effectively use a 529 savings plan as part of your estate plan, our office is here to help. Please reach out to us by calling (202) 895-2799 or email cliff@cmCohenLaw.com  to schedule a time to meet.