529 Plans: For Education and Transferring Wealth

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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.

© 2024 Trajan® Wealth LLC. Nothing in this blog is intended as investment advice, nor is it an offer to buy or sell any security. Please consult your financial advisor for questions about your personal financial situation. All investments involve risk, including the potential for loss. Trajan Wealth clients and employees may have a position in any of the securities mentioned. Portfolio holdings and other data are subject to change at any time and without notice. Additionally, the above links provided as a convenience and for informational purposes only; they do not constitute an endorsement or an approval by Trajan Wealth, L.L.C., of any of the products, services or opinions of the corporation or organization or individual. Trajan Wealth, L.L.C., bears no responsibility for the accuracy, legality or content of the external site or for that of subsequent links. These materials are for informational and educational purposes and are not designed, nor intended, to apply to any person’s individual circumstances. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Please consult with your legal and/or tax advisor before making any tax-related decisions.

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