Using a 529 plan as an estate planning tool
A 529 college savings plan isn’t just a good investment for your beneficiary’s future, it can also be used as an estate planning tool for you.
For tax year 2020, the IRS has set the lifetime exemption from estate taxes at $11.58 million. Imagine gifting a portion of those assets to your loved ones while also taking advantage of a key feature that 529 college savings plans afford accountholders that many other types of gifts don’t: control. That’s because you decide the beneficiary of each account, you direct the assets, and you can take the money back or reallocate it.
Making lump-sum contributions
The IRS allows individuals to gift $15,000 and married couples $30,000 to a beneficiary per year without triggering taxes. You can even accelerate your contributions—of up to $75,000 for individuals and $150,000 for couples—and claim the gift tax exemption averaged out over a five-year period. You can’t make any other gifts to your beneficiary during the five-year period, but after the five years are up, you can do it again.1 Your beneficiaries don’t have to wait five years; if they’re ready for school, they can use the assets immediately.
Stretching the benefits
There’s another great benefit of using a 529 college savings plan as an estate planning tool: the ability to stretch the account to multiple generations. Let’s say that you decide to set up a 529 account for your child. If there’s a balance remaining after he or she is done with college, you can simply keep the account open and switch the beneficiary to another family member, including a sibling, niece or nephew, or even a grandchild.2 You can even add to the account, assuming you haven’t surpassed your plan’s limits. And as long as the withdrawals are used for qualified college expenses, they can be made federal tax free.3
Understanding the limits
While 529s are a great vehicle for tax-friendly estate plans, there are some limits. All states cap the amount you can contribute to an individual 529 college savings account, ranging from $235,000 (Georgia, Mississippi, and Tennessee) to $529,000 (California). You do not have to open an account in the state you—or your beneficiaries—reside in.4
Have 11 grandchildren and 4 great-grandchildren? They can all get an account. Plus, you can change beneficiaries and investment options several times a year, typically without any penalties.
Be sure to check with your tax advisor, estate planning attorney, and/or financial professional before investing.