529 plans are tax-advantaged education savings accounts where contributions accumulate and grow tax-free as long as withdrawals are used for qualified education expenses. 529 plans may also be part of a wealth transfer strategy because of these additional features:
- If the Donor owns the 529 plan, they retain control of the assets.
- The gift removes the assets from the Donor’s estate, reducing their estate taxes.
- If the Donor revokes the gift, the assets return to the Donor’s estate.
529 plans can help build generational “education” wealth since the plan can pass down from one beneficiary to a beneficiary of the next generation. Here are three 529 plan wealth transfer tax saving strategies to consider:
1. The annual gift tax exclusion
While there isn’t a federal contribution deduction, the gift falls under the annual gift tax exclusion. In 2023, gifts totaling up to $17,000 per individual, or $34,000 per married couple, will qualify for the annual gift tax exclusion. Depending on where the Donor resides and the 529’s state plan, donors may also receive a state tax deduction for their gift.
2. Superfunding 529 Plans
Using a strategy referred to as ‘superfunding,’ donors can make a lump sum contribution of up to five times the annual gift tax exclusion to a 529 plan at once. Also, multiple 529 plans can be superfunded, so it’s essential to consult your tax and financial professionals before initiating a super-funding strategy to determine how it will impact your situation.
3. The lifetime gift tax exemption
The federal lifetime gift tax exemption for 2023 is $11.7 million per individual, and $23.4 million per married couple, making 529 plans a strategy to transfer wealth up to this threshold. 529 donors can contribute to multiple plans for beneficiaries (their children or grandchildren) to help lower the value of their estate below the gift tax exemption amount. As long as the contributions remain under the threshold, the Donor or beneficiaries do not pay taxes.
It is important to note that under federal law, contributions to a 529 plan cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, so consult your financial and tax professionals regarding your 529 plan’s limit.
The lifetime gift tax exemption will be reduced in 2026 to almost half, making the lifetime limit about $6.8 million per individual and $13.6 million per married couple.
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Since using a 529 plan as a wealth transfer tool can be complex, you must consult your tax and financial professionals if you intend to use 529 plans as part of your estate plan.
