Gerald Kramer
The AZ CPA
5350 N 16th St
Phoenix, AZ 85016
(602) 264-9331
Fax: (602) 279-1766
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Give the Gift of Education
529 Education Savings Plans Make the Grade
What can be more satisfying than securing an education for future generations? Since a little-known tax law change in
1996, 529 Education Savings Plans (named for Section 529 of the IRS code) have become more than just a way to pass
on the benefits of higher education. Now, these state-run investment plans are an excellent vehicle for transferring
wealth out of one's estate - without losing control of assets.
529 Plans, or "qualified tuition savings programs," allow individuals to set up investment accounts to be used by beneficiaries for educational expenses. Not only that, donors may use five years of their $11,000-per-year gift tax exclusion at once, accelerating the ability to move assets out of an estate. If the donor dies before the five years pass, only the exclusions for the years after death are brought back into the donor's estate. Each parent or grandparent can contribute separately, allowing a couple to move up to $110,000 out of their estate. All four grandparents could potentially set up accounts totaling $220,000 per grandchild. Now that's a nice graduation present!
Withdrawals from these plans remain tax-free as long as the beneficiary uses the money for qualified educational expenses, usually interpreted as room, board, books and tuition, but sometimes other expenses qualify. Note: If a distribution is made for purposes other than qualified educational expenses, the account owner will be taxed on the earnings portion of the distribution and incur a 10% penalty on the withdrawal.
Parents, grandparents, and even other relatives can contribute to Section 529 accounts, and the beneficiaries can range from children and grandchildren to cousins, nephews and, in many cases, even stepchildren.
The greatest feature of Section 529 Plans is the flexibility. Donors can decide when distributions are made, choose to take back the money, or transfer the balance to another beneficiary. This flexibility removes one of the major objections to most asset-removal strategies, the issue of irrevocability. Rarely do asset transfer strategies involving gifting allow the donor to maintain control. With Section 529 Plans, if the beneficiary decides not to go to college, the account owner can change the beneficiary to another family member. Not only do 529 Plans pass on a future built on a solid education, but they are presently a very powerful Estate planning tool.
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