Advanced Estate Planning

Why Not Make Tuition Costs a Part of Your Advanced Estate Planning?

You want to make sure that your estate is planned to maximize the benefit to your family and other beneficiaries.  You want to make sure that all your hard-earned dollars don’t go to Uncle Sam in taxes. How do you do that? You do that by making sure you have done some planning ahead of time.  That means working with an advanced estate planning professional so you know all of the options available to you.

One important option that can easily be incorporated into you advanced estate planning strategy is the use of 529 plans.  Those are plans specifically focused on having money available so your children, grandchildren, and/or great-grandchildren can go to college.  In fact, 529 plans (named after Section 529 of the Internal Revenue Code) have created a huge incentive for Americans to save for college because they have such significant tax breaks.  

This article will discuss the basics of 529 plans, answer some of your questions about the plans, and list the benefits to 529 plans that make it a good vehicle for your advanced estate planning. 

If, after reading this article, you want to learn more details about 529 plans, be sure to contact us at Doane & Doane.  We are the advanced estate planning professionals who can put you on the right track to estate planning success. Give us a call today at 561-656-0200.  

What Exactly is a 529 Plan?

A 529 plan is a savings plan that is used for either college tuition or K-12 tuition.  What makes a 529 plan special is that the account holder receives particular tax benefits from having such an account.  Those tax benefits are: (i) tax-free earnings that accrue in the 529 plan account, and (ii) tax-free distribution if the funds are used to pay for college or K-12 education.

Are There Different Types of 529 Plans?

Yes.  There are generally two types of 529 plans.  The first is a college savings plan, and the other is a pre-paid tuition plan.

1. College Savings.  The college savings plan is similar to a Roth IRA.  That is, the money you put into the plan is already taxed.  However, the earnings accrued in the account and the distributions are not taxed, as long as the money is used for college.  In addition, the plan acts similar to an IRA in that you pick investments and the account fluctuates with the market based upon your investment choices.

2. Pre-paid Tuition.  A pre-paid tuition plan allows you to pay all or part of the costs of an in-state public college education.  The money can also be converted for use for private and out-of-state colleges, but it would be considered a Private College 529 plan.  Certain schools actually offer a pre-paid tuition plan.

Can You Use Your 529 Plan for Any School?

No.  While a 529 plan can be used for virtually any college, there is a list of qualified colleges that you would need to consult.  That would be something you can discuss with your advanced estate planning attorney.  

Does Every State Offer 529 Plans?

Yes.  Virtually every state, if not every state, offers at least one type of 529 plan.  Under law, each state has the discretion to decide what its 529 plan(s) will look like if it chooses to have one.  Thus, the rules for 529 plans will differ from state to state. Again, consult your advanced estate planning attorney for more information on the 529 plans available in your home state.  

Can a 529 Plan from One State be Used for Costs in Another State?

Yes.  Under most 529 plans, your choice of college is not impacted by the state that sponsors your 529 plan.  So, you can be a Florida resident, you can invest in a 529 plan from Oklahoma, and send your student to a college in New York.

What can 529 Plan Funds Be Used For?

The funds from a 529 plan can generally be used for tuition costs and other school costs like school fees, books, room and board, computers and related equipment, internet access, and other school materials.  Note, however, that transportation costs, health insurance and student loan repayments are not considered qualified expenses for 529 plan purposes. 

What Happens if I Do Not Use the 529 Plan Funds for School Costs?

If you withdraw the funds without using them for your student’s education, then you will need to pay taxes on any earnings accrued in the account and a 10% penalty.  There are some exceptions, however, whereby you can avoid the penalty. Your advanced estate planning attorney will know more about those exceptions.

What are the Estate Planning Benefits to a 529 Plan?

We are discussing 529 plans because they are a win-win for you and your family.  You are not only able to save for a student’s education, but it can be an important part of your overall estate planning strategy.  Here are just a few of the benefits to 529 plans:

1. Marvelous Income Tax Breaks.  While the contributions to the 529 plan are after-tax payments and, thus, not deductible, the plan’s earnings and payments for college are tax free.

2. Donor Control.  Unlike custodial accounts that shift control to a beneficiary when that person reaches legal age, you as the donor retain control over a 529 plan.  The named beneficiary has no legal rights to the funds in the 529 account, so you can make sure the money is used for school and nothing else.

3. Set It and Forget It.  A 529 plan is an easy way to save for college.  There is usually a very low contribution amount to get the account started, and then you can set an automatic monthly payment amount, and leave it alone.  

4. Easy Tax Reporting.  Contributions to a 529 plan do not need to be reported on your federal taxes, and you will not receive any tax forms to report earnings from the account.  Also, up to $15,000 per individual per year will qualify you for the annual gift tax exclusion.

If you really want to make your estate work for you and your children’s or grandchildren’s education, then consider a 529 plan. To learn more, we welcome you to contact us at Doane & Doane. We are advanced estate planning lawyers who like to make sure that our clients have all the available options to make the most out of their estates.  Call us today at 561-656-0200.