Do you have assets in excess of $11 million per single person or $22 million per couple and wish to avoid estate taxes? Do you have investment monies and wish to contribute to the education of your heirs? You can choose to donate monies toward a college education for your children and/or grandchildren to avoid paying those taxes upon your death.
There are two types of 529 plans: (1) prepaid tuition plans, which allow you lock in tomorrow’s tuition at today’s rates; and (2) college savings plans, which allow you choose from a variety of investments to grow the monies to pay for the future tuition rates of your children and/or grandchildren. Both types of plans generally are sponsored by a state government and administered by one or more investment companies.
Withdrawals from the 529 plan may be used to pay for undergraduate or graduate school expenses, as well as tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school, which all constitute “qualified higher education expenses” pursuant to the Internal Revenue Code. However, any withdrawals for elementary or secondary public, private, or religious school are limited to up to $10,000 per beneficiary per calendar year.
Federal tax law permits you to give $15,000 to as many individuals as you choose each year, free from federal gift taxes. Couples can give $30,000 without incurring gift taxes. As a result, one method of reducing a taxable estate is to make scheduled gifts up to the tax-free limits each year. You might give $15,000 to each child/grandchild on an annual basis.
To exceed the $15,000 per individual or $30,000 per couple gift tax, the 529 plans are a perfect gift. You can gift a maximum of $15,000 each year per beneficiary as long as you have not made any additional taxable gifts to the beneficiary in that year. You can also accelerate your gifting schedule by electing to make a lump-sum contribution of $75,000 to a 529 plan in the first year of a five-year period ($150,000 for a couple). In doing so, you may not contribute any further monies to that particular beneficiary for five years. And if you use the five-year election and die before the five years have expired, a prorated portion of the contribution will be considered part of your taxable estate. Once the five years are up, you can make another gift to the same beneficiary in the same amounts.
For example, to understand the maximum contributions that you may give are as follows: An individual who has five grandchildren could immediately remove up to $375,000 from his or her taxable estate by contributing the money to five separate 529 plan accounts. Five years later, he or she could do it again to the same beneficiaries.
Estate planning is an art. You should consult with professionals such as lawyers and accountants to ensure that you are able to limit your tax liability in making gifts to your beneficiaries.