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Asset Protection, Estate Planning

Do 529 Plans have Tax benefits?

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When you are creating an estate plan, it is important to obtain tax benefits where possible. For general information regarding 529 Plans, please read our blog titled “Saving for College Through a 529 Plan.” This blog will discuss the tax benefits of 529 Plans, such as:

  • Federal tax benefits. Even though your contributions to a 529 Plan are not deductible from your federal taxes, your investment in the education savings account will grow tax-deferred. Additionally, when the beneficiary withdraws money to pay for college, the distribution is federally tax-free.
  • State tax benefits. If you created a 529 Plan in Utah and you reside there, the income is also exempt from state income tax.
  • Control over account. If you are making donations into the account, you retain control over it. For example, a parent that opens the account for the benefit of his or her child. With a few exceptions, the beneficiary has no rights to the funds. The donor/owner of the 529 Plan can decide when distributions should be made and for what purpose.
  • Tax reporting. Until withdrawals are taken from the account, you will not receive a Form 1099 to report taxable or nontaxable earnings.
  • Deposits. Most state 529 plans do not have income limitations or age restrictions. In fact, you can contribute substantial sums if you desire. Many state plans allow more than $300,000 per beneficiary.
  • Simplicity. Establishing a 529 Plan is a simple way to save for college. You can typically arrange for automatic deposits out of your bank account and the investments of your account are handled by the plan. In other words, you have the peace of mind knowing that you’re saving for college without any high maintenance demands.

It should be noted that some people prefer to use an irrevocable trust for education because of the flexibility a trust provides and the ability to control the funds while serving as the trustee. If you are trying to decide whether a 529 or an irrevocable trust would be more beneficial for you and your loved ones, call us today.

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.

Estate Planning

Saving for College Through a 529 Plan

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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.