529 Plans and Estate Planning

May 29 is National 529 Day! Section 529 Plans are not only a great way to save for college, they are also an essential estate planning tool as well. Minnesota adds some tax incentives to make this an even more attractive option.

What is a 529 plan?

A 529 plan is a tax-advantaged savings account that is intended to be used for college expenses. The plans are administered by each state (including Minnesota), and a family can invest in most states' plans. Funds invested in the plan grow tax free, similar to a traditional IRA or 401K. Distributions from the plan are not taxable if used for qualified college expenses, such as tuition and books.

This means that funds in a 529 plan are both protected for a specific, future use, but also that there is no tax drag on the accumulation of assets. Much of estate planning seeks to accomplish these objectives!

What is the tax incentive?

In Minnesota, a family investing in a 529 plan could be eligible for either a deduction or a credit. The credit is equal to half of the contribution for the year, with a maximum credit of $500. The credit is phased out for individuals and married couples with higher incomes. On the other hand, there are no income phaseouts for the deduction. The deduction is equal to the amount of the contribution for the year, up to $3,000 for married couples or $1,500 for individual filers. A person may claim only the credit or the deduction.

Do we have to use the Minnesota 529 plan?

No. The tax incentives are available for contributions to any qualified account. As long as the account is recognized as a 529 plan by the IRS, it qualifies for the tax incentives.

How is college savings part of our estate plan?

Section 529 plans are a great way to supercharge gifting, which is an effective way to reduce the size of a person's taxable estate. Typically, a person is limited by the annual exclusion gift amount of $15,000 per person before running into taxable gift issues. However, if the gift is made into a 529 plan, the exclusion limit is multiplied. Section 529 allows gifts to be made five years ahead, all at once. This means a parent or grandparent could gift up to $75,000 per child/grandchild in one year with no gift tax implications. If a person had five grandchildren, a fully funded 529 plan for each grandchild would remove $375,000 from that person's estate.

It's also important to remember that college students should prepare health care directives and power of attorney forms so that someone can act on their behalf if needed. See our post on Estate Planning for College Students.

Our attorneys help families and individuals implement their estate plans everyday. Contact us today if you are interested in scheduling a meeting to discuss your estate plan.

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Categories: Estate Planning