Chart Your Course: A Legal Navigation Guide
Should a 529 Plan be a Part of Your Estate Plan?
By Jessica L. Estes
Autumn is my favorite time of year. For me, it represents a new beginning. Trees lose their leaves to make way for new growth, gardeners plant their bulbs for next year’s blooms, and the NFL starts its new season and takes over your television (and maybe your life) Monday, Thursday, Saturday and Sunday.
It is also the time of year when the kids head out to the bus stop in the morning to start a new year of learning. Eager with the anticipation of meeting new friends, reconnecting with old ones and continuing on their path to becoming productive members of society, children really are our future. They will be the ones who are providing our care and advising us as we age. So, why not invest in your future?
Recently, you may have heard about 529 plans and not paid much attention. Your children are grown and have already graduated, but what about your grandchildren, or great-grandchildren? Or, if you do not have any children of your own, do you have any nieces or nephews, or know any of your friends’ grandchildren that are still in school? With the rising costs of undergraduate education, families need to start saving earlier and the sooner the better. A 529 plan may be the answer and could benefit your estate plan as well.
What is a 529 Plan? A 529 plan is a tax-advantaged savings plan operated by a state or qualified educational institution that is designed to make it easier to save for college. There are two basic types of plans: prepaid tuition plans and college savings plans.
Prepaid plans let you lock in future tuition costs at today’s prices, while college savings plans are designed to increase over time to cover tuition costs at the time the beneficiary begins college. Generally, the prepaid plans guarantee a minimum rate of return, but you will be limited to that rate. Conversely, the college savings plans generally do not have a guaranteed minimum rate of return so you will receive whatever return the stock market generates.
Also, the prepaid plans may be limited to certain age groups and usually require that the funds be used within 10 years of the date the beneficiary is scheduled to start college. Some prepaid plans may also restrict when you can withdraw the funds.
What are the advantages to investing in a 529 Plan? The main advantage of a 529 plan is that the earnings generally are not subject to federal or state income tax as long as the funds are used for the qualified education expenses, i.e., tuition, fees, books, room and board of the beneficiary. Although contributions to a 529 plan are not deductible on your federal return, some states, including Maryland, will allow you to deduct a portion of your contribution on your state return. In Maryland, you can deduct up to $2,500 each year per beneficiary with the ability to deduct excess contributions in the subsequent 10 years. This benefit is available only to those contributors who are the actual account holders and Maryland taxpayers.
Also, for federal gift tax purposes, any contribution to a 529 plan generally is considered a completed gift so it will reduce the value of your estate and will not be subject to estate tax when you die. However, there are contribution limits and if your yearly contribution exceeds $14,000 (in 2014) to any particular beneficiary, then you may have to file a gift tax return.
Another benefit to the 529 plan is its flexibility. Generally, the beneficiary may use the funds at any participating school even if they are a part-time student. Also, if a beneficiary does not use the funds in the account, you have the option to change the beneficiary designation, or roll it over tax-free to another plan.
What are the disadvantages of a 529 Plan? The biggest disadvantage is that if the funds are not used for qualified education expenses then the earnings are subject to federal and possibly state income tax. Additionally, a 10 percent federal penalty will be imposed on the withdrawal. Among other negative consequences, for Medicaid purposes, a 529 plan likely is a countable asset that must be spent down before you will be eligible for benefits.
If you are considering a 529 plan, you should consult with a qualified elder law attorney and financial adviser to determine if a 529 plan is right for you.
Jessica L. Estes is an elder law and estate planning attorney at Byrd & Byrd, LLC with offices in Bowie and Prince Frederick. She can be reached at 301.464.7448 or on the website at ByrdandByrd.com