529 plans have morphed into Estate Planning Tools

529 plans have morphed into Estate Planning Tools

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529 plans has been transformed into estate planning tools, thanks to alterations in the 2017 tax laws. 529 college-savings plans are being utilized as estate planning tool and to pay for more education-related expenses than ever before.

As we progress, we’ll explain how this plans have been transformed into estate planning tools. However, before we go into that, let’s look at what estate planning is.

What is Estate Planning?

Estate planning is the process of indicating how you want your estate to be handles after your death or if you are incapacitated and unable to handle things on your own. The most common estate planning definition is “the process of making plans for the management and transfer of your estate after your death, using a will, trust, insurance policies and/ or other devices. “ Estate planning has been around for several years, but is becoming very common.

There are several parts of Estate planning, But the first thing you need to do is carry out a thorough review of your estate assets. Your estate consist of all the property you own, including:

  • Cash
  • Cars
  • Savings
  • Clothes
  • Jewelry
  • Investments
  • Retirement accounts
  • Land
  • Etc

What is a 529 plan?

A 529 plan is a college savings plan that provides tax and financial aid advantages. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs. There exist two types of 529 plans:  college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan. There is also a 529 plan operated by a group of private colleges including universities.

Formerly intended to offer parents of young children the ability to save and invest money for future anticipated college related expenses, recent changes in 529 plans now allow funds to be used for private elementary school expenses, rather than college alone. The new rules are accepted by parents and grandparents looking for a better way to settle private educational costs.

529 Plans provides two main benefits:

  1. Assets grow tax-deferred and are withdrawn tax-free for qualified expenses, and,
  2. Contributions made by parents and grandparents are deemed a gift, providing estate planning benefits

Over the years, both wealthy and lower-income parents and grandparents have been the primary contributor to these plans. Any parent or grandparent can make gifts of around $15,000 each year, per individual person (child) and to as many individuals as they wish.

Section 529 plans allow gifts to be made five years ahead, all at once. Therefore, a grandparent can gift $75,000 per grandchild at once for the next five years. If the grandparent has five grandchildren, then they can contribute or gift $375,000 at one to the 529 plans.

There would be zero gift tax, assuming no other gifts were given to that child over those years. Such generous donations allow a reduction in the contributor’s taxable estate. The federal estate tax exemption—the amount an individual can leave to heirs without having to pay federal estate tax—is $11.7 million for 2021. So, this is a perfect strategy for parents and grandparents who may have estates that are valued over $11.7 million. Also, the state tax deductibility on the front end is a huge benefit to contributors. In Ohio, of instance, a grantor can deduct $4,000 per beneficiary, each year and the deduction can carry forward.

Any money remaining in a 529 plan after college can continue increasing for the next generation, or increase perpetually for future generations. In addition, an important benefit to a 529 includes transferability. Funds in a 529 account may be moved from the original beneficiary to another. There are several good reasons families are now using 529 plans as an estate planning tool, allowing untouched funds in a 529 to be transferred to future generation.

Need the help of an estate planning attorney?

If you need the help of an estate planning attorney, don’t hesitate to contact us. Our estate planning attorneys have what it takes to create an estate plan that suits your needs and that of your beneficiaries.

DISCLAIMER: The information provided in this blog is for informational purposes only and should not be considered legal advice. The content of this blog may not reflect the most current legal developments. No attorney-client relationship is formed by reading this blog or contacting Morgan Legal Group.

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