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The college savings account that is a win-win for estate planning

On Behalf of | Aug 12, 2020 | Estate Planning |

By the time most of us reach the estate planning stage of life, the idea of putting money toward college savings is a distant memory. However, for individuals with young family members, such as grandchildren, this is worth reconsidering.

The 529 college savings plan is billed as a vehicle to help families pay for the cost of tuition. But these accounts have a wide range of additional benefits – including for older Americans looking to protect their legacy through strategic estate planning decisions.

What is a 529 college savings plan?

The purpose of a 529 savings plan, historically, has been to provide an investment vehicle that can pay for a child’s college tuition. These plans are generally overseen by each state. Here in Colorado, these plans go through a division of the Colorado Department of Higher Education known as CollegeInvest.

As Investment News explains, the 2017 tax law reforms provided new opportunities for those doing estate planning. Contributions to an eligible loved one’s 529 savings plan can take many forms. The most effective estate plans will use these revamped tax laws to their advantage.

Anything you contribute to the 529 savings plan of a grandchild, niece or nephew, or other eligible family member can qualify for the annual gift tax exclusion. That’s up to $15,000 annually for an individual, or up to $30,000 for a couple.

In addition, you can give a lump sum of $75,000 as an individual ($150,000 as a couple) straight away, and immediately accrue five years’ worth of such exclusions. Keep in mind, this can be repeated every five years and for multiple beneficiaries (though Colorado has a maximum contribution level of $400,000 per beneficiary, across all types of accounts).

The benefits of a 529 for estate planning

If you remain mindful of these exclusions and limits when incorporating 529 contributions into your estate planning, it means you can:

  • Give a gift directly to loved ones, without gift tax obligations
  • Ensure you leave a valuable, lasting legacy
  • Ultimately reduce the size of your taxable estate

Importantly, you maintain some control of contributed funds – even though the law views them as a completed gift that is no longer part of your estate. You can choose how the funds are invested, who receives the funds and when the distributions are made available. In addition, these contributions are often transferrable to another eligible family member without penalty, should certain plans fall through.

The benefits of a college savings account have never been clearer.

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