Estate Planning for 529 Education Funds

Extension of the “generation-skipping” transfer tax rules for individual investment retirement accounts provided for by federal Internal Revenue Service (IRS)  26 U.S. Code, Section 529 and some state tax laws, 529 education funds are a convertible estate planning tool that earmarks funds for a grandchild’s college tuition and expenses. Now more than ever, advanced estate planning is desirable. Grandparents are taking advantage of incentives that will benefit future generations to come by ensuring that grandchildren can pay for higher education degree programs with proceeds from a contribution plan fund. For estate owners. Planned giving specialists can learn how 529 plan tax-exempt transfers benefit nonprofit schools through funds transfers rather than direct charitable giving.

The 529 Contribution Fund

A form of investment contribution fund, 529 education plans correspond with government education sponsored institutional programs. The IRS permits an investor to elect a tax-advantage savings plan or prepaid tuition plan to secure tuition rates for the future, by funding a child’s or grandchild’s college expenses in advance. The benefit of 529 fund savings plans, is that participants can make periodic cash contributions, whilst retaining the benefit of tax-free withdrawal of principle and earnings from the fund for “qualified expenses.”

Estate Effects of TCJA

The federal Tax Cuts and Jobs Act of 2017 (“TCJA”) created the conditions for 529 plan contributors to set aside finance for private elementary and high school tuition and expenses. This enhanced the existing provision of college and university related expense account savings tax-deduction. Prior to the enactment of TCJA, tax-free earnings from investment contribution education plans all coincided with the Coverdell Education Savings Account (ESA) program. The preceding Coverdell ESA offered fewer flexible options for estate planners. With the Act, remaining funds held in Coverdell ESA accounts were subject to tax-exemption rollover. The TCJA also revised ESA limits amounts for K-12 tuition and expenditures to $10,000 per student, annually.

Convertibility and Transferability

One of the main benefits resulting from implementation of TCJA reform, are the options for convertibility and transferability affecting 529 fund accounts. This is distinct from Coverdell ESA accounts, which offered no transferability. The legislation now affords transfers between beneficiaries as well. However, funds must be used by final beneficiaries of 529 plan college fund transfers by the age of 30 years old.

The IRS assigns “completed” status to investment contribution plan transfers for tax purposes. Therefore, contributions made to a 529 education fund plan are eligible for tax-exempt reporting by estates and beneficiaries. Federal IRS rules for gifts and generation-skipping transfers (GSTs) apply to estate holders and recipients subject to lifetime exemption amounts.

Limitations imposed on 529 plans prohibit acceptance of cash contributions, securities, and other convertible assets. Notwithstanding investment contribution limitations, 529 plans offer an estate or trust better control over distribution transfers, shielding assets from further taxation. Account fees may be higher than those normally applied to parallel investment vehicles. Estate planners can consult with a professional estate tax specialist to find out how a 529 education fund plan will contribute their family’s future.

Superfund 529

Originally enacted as IRC tax code legislation in 1997, the tax-free designation of 529 plan accounts as federal superfund strategy, has effectively delivered the exponential public financial returns since the law’s inception. Section 529 plans had amassed to $282 billion in assets coinciding with TCJA in 2017. Initially intended for parent-child transfers to tax-exempt investment accounts, 529 education fund plans are today viewed as one of the most flexible options for shelter of family estate assets within a living trust.

Super fund 529 college savings accounts are tax-exempt vehicle for personal finance that can also be transferred to an estate trust or will for distribution to named beneficiaries at end of life.

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