Saving for College Through a 529 Plan

Save for CollegeThe cost of paying for higher education is steadily increasing. Most parents (and grandparents) are concerned with how their children will be able to pay for college. One option to consider is establishing a 529 education savings plan. The term “529 plan” comes from the section of the Internal Revenue Service code that creates and defines them. One of the primary benefits of a 529 plan is it provides a tax efficient means for contributing money that is earmarked for educational costs that a beneficiary can access in the future.

The contributions you make to a 529 plan are treated as a gift for tax purposes. Currently, you can make gifts up to $14,000 in value per person each year without being required to file a gift tax return. There is also a five-year election that can be made that allows you to contribute up to $70,000 in one year (or it can be up to $140,000 with your spouse) to a 529 plan. This election treats the gift as $14,000 payments over a period of five years. However, you cannot contribute any other funds to that beneficiary within that five year term without filing a gift tax, and if applicable, paying a gift tax. It should be noted that if you use the five-year election and you pass away before the fifth calenar year, any contributions made in the years after your death will be included as part of your taxable estate.

If you are looking for a wise investment and you are interested in contributing to your family’s future education, consider the 529 plan. It is an effective estate planning tool that allows you to provide for your children or grandchildren, and it permits you to decrease your taxable estate. This is especially true if your estate exceeds the exclusion amount.

Because the 529 plans require that funds be permanently ear-marked for education (and there is no guarantee that your family will seek higher education), some clients prefer to use an irrevocable trust for education of their children or grandchildren, which has more flexibility, and maintains control over the assets in your hands as a trustee. Understanding the benefits and limitations of 529 plan, and the benefits and limitations of an irrevocable trust is essential before making the decision to permanently set aside funds.

To learn more about using a 529 plan as part of your estate planning, contact us to schedule an initial consultation. The Astill Law Office has provided high quality legal services for over 30 years. We specialize in wills, trusts, estate planning, and asset protection. If you have any questions about creating a Trust, Will, or estate planning in general, contact The Astill Law Office at 801-438-8698.