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Part 2: Estate Planning With 529 Educational Savings Accounts – Wills/ Intestacy/ Estate Planning


While there are many different ways to save money for education,
529 accounts are widely regarded as the best. Not surprisingly,
questions about how to manage 529 accounts are an increasingly
important estate planning topic. This three-part series offers an
overview of 529 accounts from an estate planning perspective, start
to finish! In Part 1, you will find answers to what a 529 account
is, how and where to open a 529 account and who should own one. In
Part 2, you will gain insight into who can contribute to a 529
account, options and considerations in gifting to a 529 account,
investing and using one. In Part 3, you will find answers regarding
the income tax consequences of distributions and estate tax
treatment of a 529 account, the impact of a 529 accounts on a
beneficiary’s eligibility for financial aid, whether you can
change the beneficiary and alternatives to a 529 accounts. Read on
to learn all about these accounts, and please contact Elizabeth
Bawden or your Withers estate planning attorney with any related
questions.

Who may contribute to a 529 account

A parent, grandparent, or any other friend or family member may
contribute to a beneficiary’s 529 account so long as the plan
sponsor permits this. Be aware, however, that some plan sponsors
only permit contributions by the owner of the account.

Gifting to a 529 account

There are many ways to gift to a 529 account.

Annual exclusion gifts. Each year, an
individual can gift an amount up to the “annual
exclusion” to a 529 account for a beneficiary without any gift
tax consequence or reporting. The annual exclusion in Section
2503(b) of the Internal Revenue Code is the total amount any
individual can gift to any other person annually, free of gift tax.
The annual exclusion is adjusted for inflation, so increases
periodically, and in 2022, is $16,000. When determining how much to
contribute to a 529 account for a beneficiary, an individual must
subtract any direct gifts made to that same beneficiary in the
year, as all gifts combined must be under the $16,000 limit to
qualify.

Front-loading for maximum growth. Section 529
includes a special provision that allows an individual to
front-load a 529 account with up to 5 years’ worth of annual
exclusion gifts. For example, an individual can contribute $80,000
to a Section 529 plan for one beneficiary in 2022, using her annual
exclusion gifts for 2022-2026 in advance. This provides an
excellent opportunity for additional growth within a 529 account
prior to a beneficiary needing the funds for education. This does
mean the individual cannot make additional annual exclusion gifts
to the beneficiary during the five-year period, and also requires
the filing of a Form 709 Gift Tax Return, for the year of the gift
even though no tax is due. See discussion below on estate tax
treatment of 529 accounts for a discussion of death prior to the
end of the 5 year front-load period.

Other gifts. An individual may gift amounts in
excess of the annual exclusion to a 529 account. These gifts must
be reported on a Form 709 Gift Tax Return for the year of the gift.
Transfers to 529 accounts are also subject to the
generation-skipping transfer (GST) tax if the beneficiary is two or
more generations removed from the contributor. No gift tax or GST
tax is due unless the contributor has used their entire exemption
amounts from these taxes. 529 accounts are required to limit
contributions in excess of what is necessary to provide for the
education expenses of the beneficiary. These amounts vary by state
and range from $235,000 to $550,000 per beneficiary (the limit in
California is $529,000).

Income tax benefits. There is no federal income
tax benefit for gifting to a 529 account. However, a number of
states offer a state income tax deduction or credit for
contribution to a resident beneficiary’s 529 account.

Investing a 529 account

The owner determines how the 529 account is invested, within the
options allowed by the plan sponsor. As noted above, costs vary by
plan. Many plans have age-based investment options that are more
aggressive while the beneficiary is young and become increasingly
more conservative as the beneficiary reaches college age.

Using a 529 account

Distributions from a 529 account are available for
“qualified education expenses”:

Post-secondary education. Generally, tuition,
fees, books, supplies and equipment required for the enrollment or
attendance of a beneficiary attending a college, graduate school,
vocational or trade school, so long as the institution participates
in the US Department of Education’s federal student aid
program. As well, certain costs for room and board may be covered
(on-campus room and board or off campus housing up to the cost of
on-campus room and board).

Pre-college tuition. While post-secondary
education is the focus of 529 accounts, effective January 1, 2018,
up to $10,000 per tax year per beneficiary is permitted for tuition
at elementary or secondary schools. As well, distributions are
permitted for payment of up to a lifetime limit of $10,000 toward
principal on any qualified education loan of the beneficiary or
their sibling.

Distribution procedure. Each plan sponsor has a
different procedure that must be used to request a distribution,
and some 529 account owners find it difficult to request and
receive distributions in a timely manner. In this case, working
with an investment advisor (as mentioned above), may make this
process smoother. It is best to have distributions from 529
accounts paid directly to the eligible education institution rather
than the owner. However, it is permissible for the owner to pay the
qualified education expenses directly and then obtain reimbursement
from the 529 account as long as the distribution occurs in the same
year the expenses are paid.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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