Estate Planning
with 529 College Savings Plans

The College Savings Plan (Section 529 Plan), the newest of tools available to the estate planner and financial advisor, may become the single most popular wealth transfer vehicle available to American families.

As with many laws, it is only in the fullness of time that its true impact can be understood. Even at this early point in its life, Section 529 has generated a number of planning opportunities never before considered. Beyond the bounds of college savings, these plans afford a family the ability to transfer wealth from generation to generation, free of income, estate and gift taxation, and they also allow colleges and universities the ability to provide a tax-free tuition benefit to the children of employees. In addition, Section 529 College Savings Plans have changed forever our most basic understanding of how gifts can be made to children and grandchildren.

Consider the family discussing the strategies available to them for the purpose of making gifts to their grandchildren. Previously their choices were limited to using some form of irrevocable trust or custodial type account as the vehicle into which such gifts were made. Both have their advantages and disadvantages, but common to both was the loss of control by the grantor (gift maker). The Section 529 College Savings Plan has now made the impossible possible. We can now make completed gifts for estate and gift tax purposes while continuing to retain the right to change the person that will have the beneficial enjoyment of the assets. In fact, the grantor even retains the power to take the assets back into his or her own hands, although paying a tax penalty for doing so.

The true estate-planning 529 opportunity can be found in a well thought out family wealth transfer plan. For example this can be done by having a 529 College Savings Plan account established into which mother and father deposit their combined maximum gift tax-free amount of $110,000 (5 year front-end loading of the allowable $11,000 per person for each parent) for the benefit of a child. The Account grows in size over the years as the family has other money to be used to satisfy the child's college expenses. When the child has his or her own child, mother and father change the beneficiary on the account in favor of their newborn grandchild. While simple and artful, care must be given in structuring these transfers and beneficiary changes, as there may be gift tax and generation skipping taxes to be managed with proper use of available credits.

In a simpler case, annual gifts to a Section 529 College Savings Plan Account can be made by parents or grandparents in amounts that do not exceed the allowable annual gift and generation skipping exemptions (currently $11,000 per person per donee). These gifts will be treated as completed gifts thereby escaping any estate taxation at the time of passing. The tax deferred growth; followed by tax-free withdrawals for college, while permitting the grantor to retain control over beneficial enjoyment, is a unique benefit of the 529 plans.

As the College Savings Plan and its estate planning opportunities become more popular, techniques will develop whereby trusts, revocable and irrevocable, will be used to structure ownership of these wealth transfer plans.

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