How to Handle 529 College Savings Plans With Your Estate Plan
Many parents contribute to 529 college savings plans on for their children. The parent can contribute any amount to the 529 plan, and most do not have age or time restrictions to make withdrawals. You can easily transfer funds to another qualified 529 plan at any time without punishment and can roll over the funds in the 529 account to another child in the family. You can easily transfer funds to another qualified 529 plan at any time without punishment.
But how do these plans affect your estate plan, and what do you need to know about their potential tax ramifications? Here’s a quick overview.
What to know about your 529 plans
Even though the owner of the plan maintains control over the money while it is in the account, contributions to these plans are considered complete gifts to the person who will eventually benefit from the plan.
If you make a contribution between $15,000 and $75,000 to a 529 plan, you can elect to treat the contribution as made over a five calendar-year period for gift tax purposes. This allows you to utilize as much as $75,000 in annual exclusions to shelter a larger contribution.
For example, a parent can give up to $75,000 in 2021 as a lump sum to each child without having to pay gift taxes, based on the $15,000 annual gift tax exclusion. The mother and father can together jointly give up to $150,000 to each child. However, the parents will be unable to give any more money to each child in 2021, 2022, 2023, 2024 and 2025 unless the annual gift tax exclusion increases. Then, the parent could supplement the gift. If you die before that five-year period expires, your estate will include the balance of the excess gift contribution for the purposes of the federal estate tax calculations.
If the 529 plan beneficiary dies before the funds are fully used, you can take them out without penalty, but those funds will then be subject to income taxes. You can change the beneficiary, but your new beneficiary must be related by blood or marriage.
For more information about 529 college savings plans and how you can use them in your estate planning arsenal, contact an experienced Tampa, FL lawyer at BaumannKangas Estate Law.