People in California who save for their dependents’ college tuition in a Section 529 college savings account are able to accumulate tax-free accounts. This is a major factor for why people choose this type of account, but what many people might not realize is that these accounts are also beneficial during estate planning.
Contributing small amounts to 529 accounts is effective, but some people prefer to give a large lump sum. One of the nice things about these accounts is that contributions are considered gifts, and up to $14,000 is excluded from gift taxes. The exclusion applies to each contributor, so a couple is able to put in $28,000 into the account tax-free annually.
Another considerable advantage of using a 529 account is the ability to change beneficiaries without tax consequences. If one person decides not to go to college or gets a full ride scholarship, the money could be given to fund another person’s college education. However, the new beneficiary must be related to the initial beneficiary. They must also be part of the same generation or a higher generation. Contributors could also get their money back with only a 10 percent penalty.
Using this strategy to reduce a person’s taxable estate is only one of many options that person might have to shield their assets from unnecessary taxation. Those who are seeking other ways to protect the value of assets when they are passed to the next generation might benefit from working with an estate-planning attorney. That attorney may be able to develop a strategy that provides for the interests of a client while offering ways to avoid undue tax burdens.
Source: MarketWatch, “Using 529 college savings accounts for estate planning“, Bill Bischoff, October 07, 2014