When you think about your life’s path, you are probably grateful for the education that you have received. This is something to think about going into the Thanksgiving holiday, and from an estate planning perspective, you can pay it forward through the utilization of 529 college savings plans.
Financing Higher Education
If you know how a Roth individual retirement account works, you can apply that structure to the 529 plan. Contributions into the account are made after taxes have been paid on the income, and the interest accumulates tax-free over the years.
When the beneficiary is ready for college, the withdrawals can be used for tuition, books, fees, lodging, and meals. The distributions are not subject to any further taxation.
In addition to the obvious benefit when the student is actually attending college, the 529 plan serves another purpose. Younger students are more focused on their studies when they know that they will definitely be able to go to college, and this is another inherent benefit.
Savings Plans vs. Prepaid Public University Plans
There are two different options available when you establish a 529 savings plan. With the traditional savings plan, the student can use the funds to attend any approved institution of higher learning.
The other option is the prepaid public university plan. If you go this route, you purchase in-state college credits that can be used to pay for public college expenses.
You forfeit freedom of choice, but you are purchasing credits at the current rate. Since the student will be attending college when the costs are considerably higher, this is a major advantage.
K-12 Education Expenses
Prior to 2018, the 529 plans were strictly college savings plans. However, at the end of 2017, a provision in the Trump Tax Cuts expanded the scope of these accounts. You can now use up to $10,000 per year, per beneficiary to cover K-12 education expenses.
In the state of South Carolina where we practice, you can deduct the full amount of your 529 contributions when you file your state income tax returns.
There is no state level estate tax or gift tax in South Carolina, but there is a federal estate tax that is unified with the gift tax. Most people never have to pay it, because there is a credit or exclusion that can be used to transfer a certain amount tax-free.
This year, the exclusion is $11.58 million, but it scheduled to go down to $5 million adjusted for inflation at the end of 2025.
In addition to the multimillion dollar unified gift and estate tax exclusion, there is also a $15,000 per year, per person gift tax exclusion. You can give this much to any number of recipients in a calendar year without incurring any transfer tax liability.
If you are exposed to the tax, or you think that you may be in the future, you could contribute $15,000 annually into multiple 529 accounts. The contributions can be doubled if you are married.
This would allow you to transfer assets tax-free, and the value of your estate for tax purposes would be reduced. It should be noted that there are lifetime contribution limits, but they can be as high as $500,000.
You can take money out of a 529 savings plan for any reason, and this can be comforting, because you never know what may happen in the future. If you do this, you have to pay a 10 percent penalty, and interest accumulation is subject to taxation.
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