Utilizing a 529 Plan as a Wealth Transfer Tool
- May 26, 2023
- Posted by: Keri Pugh
- Category: College Planning
529 plans are designed for saving for education and are beneficial since contributions accumulate and grow tax-free as long as withdrawals are used for qualified education expenses. But 529 plans may also be part of a wealth transfer strategy. Donors often use 529 plans to give the gift of education, but also 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.
When transferring wealth using a 529 plan, there are three tax-saving strategies to consider:
- 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.
- 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.
- 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.
529 plans can help build generational “education” wealth since the plan can pass down from one beneficiary to a beneficiary of the next generation. 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.
Important Disclosures
The content in this material is for educational and general information only and is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
LPL Tracking #1-05363515
Sources:
https://www.savingforcollege.com/article/how-much-can-you-contribute-to-a-529-plan
https://www.kiplinger.com/taxes/gift-tax-exclusion
Keri Pugh is a Wealth Advisor with Fusion Financial Group, an independent financial planning firm and fiduciary based in Denver, CO. Keri has over 20 years of experience in the industry, as both a financial advisor and Principal. She obtained a bachelor’s degree in Finance from the University of Northern Colorado and is an alumna with national sorority Delta Zeta. Keri holds a variety professional licenses, carries the esteemed mark of Certified Financial Planner (CFP®), meeting rigorous education and experience requirements in key areas of financial planning, as well as the designation of Accredited Investment Fiduciary (AIF®), a symbol of her dedication to upholding the fiduciary standard for clients. As a wife and mother to two young children, Keri is particularly drawn to working with thriving families and women. This is not only reflected within her practice but also in her regular sponsorship of the local PTA and volunteer work with the elementary school. Outside of the office, Keri enjoys traveling, skiing, and the Colorado great outdoors with her family. She often lines up movie marathons for the family and, in line with many clients, is a beginner golfer and a wine enthusiast. To learn more about Keri, connect with her on LinkedIn.
