Money comes and goes, but your education becomes part of the fabric of who you are in many different ways. When you are planning your estate, you may want to consider giving the gift of education to younger family members that have not made their marks in the world.
If this sounds appealing, you can to contribute into a 529 college savings plan to provide these opportunities.
Tax Advantages
The framework for the 529 savings plan is similar to the arrangement for Roth individual retirement accounts. Contributions are made after your pay taxes on the income, and the interest accrual is not subject to taxation as long as you see the plan through to fruition.
You name a beneficiary when you establish the account. When they enter college, they can withdraw funds to pay for tuition, books, fees, and basic living expenses, and the distributions are not taxable.
Two Different Types of Accounts
There are two different types of 529 college savings plans. One of them allows the beneficiary to use assets in the account to attend any accredited university or college.
In addition to the standard accounts, there are also prepaid tuition plans. As the name would indicate, you purchase credits that can be used to pay for attendance at in-state public institutions.
The nice thing about the prepaid tuition option is the fact that you are locked in at the current rate for tuition and fees, even though they will be higher when the student actually starts going to college.
Withdrawal Penalties
There is good news and bad news when it comes to withdrawing money that is not going to be used to pay for education related expenses. You can do this, but there is a 10 percent penalty, and you have to pay taxes on the interest that you extract.
Beneficiary Designations
In some cases, the first beneficiary will not use all the funds for one reason or another. Under these circumstances, you can name a contingency beneficiary, and they would be able to use the remainder.
Lifetime Contribution Limits
There are lifetime contribution limits, but they are sufficient for most students. The exact limit will depend on the rules of the bank that you are working with, but they can range from $235,000 up to a half a million dollars.
K-12 Education Expenses
Traditionally, 529 accounts were strictly college savings accounts. That changed in 2018 when the Tax Cuts and Jobs Act went into effect. Under the new rules, you can use up to $10,000 per student, per year to cover or help cover K-12 expenses.
Estate Tax Implications
There is a federal estate tax that can potentially be a factor for all Americans, and we have a state-level estate tax here in Vermont. The federal tax is only applicable on transfers that exceed $11.58 million in value. This is called the exclusion, and state-level exclusion in Vermont is $4.25 million.
In addition to the estate tax, there is a federal gift tax that is in place to stop people from giving large gifts to avoid the death tax. As a result, the $11.58 million exclusion applies to lifetime gifts and the estate that will be transferred after you are gone.
There is a separate annual gift tax exclusion that you can use to give $15,000 to any number of people tax-free in a calendar year. You could use this exclusion to make contributions into 529 college savings accounts to reduce the value of your estate for tax purposes.
Schedule a Consultation Today!
We are here to help if you are ready to put an estate plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 802-879-7133.
Wendy now works with clients on estate plans, including Trusts, Wills, Powers of Attorney, and Advanced Directives.Wendy also assists clients with Medicaid Planning and helps clients to qualify for Medicaid assistance.Wendy is a member of the Vermont Bar Association and both the national and Vermont chapter of the National Academy of Elder Law Attorneys.
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