Using 529 Plans for Estate Planning

Estate planning is one of those topics that seems to be widely misunderstood.

First, there are different kinds of estate planning. The most necessary kind for everyone is simply having a will of some sort. It really doesn’t have to be anything fancy, especially if you don’t have a lot of assets. There are a lot of forms out there you can fill in. While that is definitely NOT the way to go if you have anything complicated or fancy, or if you have a lot of assets, they are pretty much fine for the average person.

The second type of estate planning is financial estate planning, that is trying to avoid paying estate taxes. This actually applies only to a small percentage of people.

Will I Have to Pay Estate Taxes?


That was easy, huh?

estate taxes 529 plans
Form 706 – This is how you pay estate taxes.

It’s a trick of semantics. Estate taxes are the only taxes that you will never have to pay. That’s because your heirs, or more specifically, your estate, actually pay estate taxes after you are dead, so you don’t pay them. Even if you inherit something, you don’t pay the taxes, the estate does, before the assets become yours, so technically, no person ever pays estate taxes.

Of course, that’s not what we meant, so let’s get serious here.

First up, remember that you can pass an unlimited amount of money, investments and property to your spouse. So, if you die first, no estate tax for you.

Second, remember that the basic exclusion for estate taxes is actually quite large. How large? Well, if you are getting your financial advice from the internet and not from a lawyer or financial advisor that already works for your family, it’s probably more than you have.

For 2016, the basic estate tax exemption is $5.45 for each individual. A married couple could, theoretically, shield $10.9 million from estate taxes. Die and leave behind less than that, and tax estate planning is moot for you. (A will isn’t, though. Stop messing around and fill one out.)

Can I Give My Money Away?

Sure. Kind of.

The IRS sets an annual exclusion for gifts. Keep your gift below this amount, and there are no taxes, including estate taxes on your gift. Give more, and that starts setting off some weird potential taxes and accounts.

Fort 2016, the annual gift tax exclusion is $14,000 per person. So, if you are married, you and your spouse can give $28,000 total to someone.

So, how does setting up a 529 plan come in?

There are a couple of things that make contributing a gift into someone’s 529 plan a good estate planning move.

First, contributions to a 529 plan are considered completed gifts, even though, the owner of the 529 plan retains some control over the funds. That makes it a great way to give to under-age children without having to setup trusts.

Second, while you’re still limited to giving $14,000 per year, the rules of the 529 plan allow you to accelerate those annual gifts by five years. In other words, you can give 5 x $14,000 = $70,000 all at once by contributing into a 529 plan. Now, that still counts as five years worth of gifts, you just get to do it at one time. In other words, if you do contribute $70,000 to little Bobby’s 529 plan in 2016, you can’t also give him another $14,000 in 2017 (or 2018, 2019, 2020) Of course, if you are married, you and your spouse can both make this gift, so a single contribution of up to $140,000 can be made all at once.

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Again, since this is considered a completed gift, that $140,000 will not count to your estate tax exclusion or calculations.

This is especially powerful for wealthy grandparents. Imagine if you have three kids of your own, and each of them has two children, that makes six grandkids. Give each of the grandchildren $140,000 and you just removed $840,000 from your estate, all without having to worry about control of the funds.

As an added bonus, if you live in one of the states that offer a tax deduction for 529 contributions, then you may be able to deduct some, or all of the contributions you make.

529 For Estate Planning

529 plans can offer some benefits from an estate tax planning point of few. However, their primary function is to provide a way to save for college. Fortunately, those people who both have enough money to actually worry about estate taxes, also are all too happy to provide for the education of their children or grandchildren. It all adds up to making 529 college savings plans and estate planning a win-win situation.

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