An Educated Investment: Estate Planning benefits of a 529 plan

Private Banking

With education costs climbing every year, it's hard to imagine a better gift for a young student than a solid education fund. Fortunately for the giver, establishing a 529 education savings account can be just as beneficial for the account owner as its beneficiary.


Tax Free Growth

The owner of the plan does not receive any deductions or write-offs for contributions to a 529, but once the funds are in place they grow tax-free if used by the beneficiary for any type of post-secondary education. Whether they pursue undergraduate, graduate, or vocational programs, a 529 plan provides your beneficiary with an extremely tax-efficient way to pay for tuition.


Low Risk, Low Penalties

While there are penalties for using 529 funds for non-education purposes-like starting a new business or other venture-they are quite modest. The account principal is returned to the beneficiary tax-free, and without penalties. The fund growth is subject to a relatively small 10% penalty, plus regular income tax rates. Considering most beneficiaries are young in their careers and in a lower tax bracket, these penalties tend to be very manageable.

Exceptional Control

When you establish a 529 plan, you're not only investing in your beneficiary's education and future, you're protecting yourself from taxes that could be devastating to your estate, all the while maintaining complete control of the account.

Any funds you place in the 529 remain entirely in your control, but are considered a completed gift-meaning they grow outside of the owner's estate and are protected from taxes or penalties.

Current law states that you can avoid paying estate taxes if you have less than $5.5 million in assets, but anything above that number gets taxed up to 45%. For people like small business owners and farmers, this can be a devastating tax. Imagine leaving your farming operation to your family only to force them into debt just to pay the estate taxes on your legacy.

Anyone can start a 529 plan for any beneficiary and contribution limits are tied to standard annual gifting limits-$14,000 (individual) or $28,000 (married couple) per year, per beneficiary. In the case of 529 plans, though, this gift limit can be accelerated to $70,000 or $140,000-the equivalent of five years of giving.

With so many tax advantages and no associated legal fees to establish, 529 plans are a good option for anyone who is saving for education, but excellent for people who want to defer taxes andmaximize the value of their estate.

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Nathan Quello is a CERTIFIED FINANCIAL PLANNER™ with Loft Advisors in Sioux Falls.

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