529 plans AND ESTATE PLANNING

The rewards of a 529 plan are twofold.

  1. They are considered completed gifts that reduce the size of your taxable estate.
  2. They ease the financial strain on your children and can help make a college education a reality for your grandchildren.

Why grandparents choose 529s

Because of their unique tax advantages, 529 plans have become a popular vehicle to both help support your loved one’s education and potentially reduce estate taxes. A 529 plan is the only investment vehicle that allows you to make a “completed gift,” yet take the money back for any reason at any time.1

Your benefits add up -  In addition to the basic tax advantages of 529 plans – tax-deferred growth; tax-free withdrawals when used for Qualified Higher Education Expenses; and state tax deductions for contributions (available in most states), – there are several valuable estate tax benefits you should know about.

529 estate tax benefits

Turn complexity into simplicity. Do estate and gift tax regulations seem complicated? With 529 plans, the tax advantages are simple. Your contributions:

  • Reduce the size of your taxable estate by the value of your 529 plan account
  • Are considered a “completed gift” for estate tax purposes, yet the assets can be taken back at any time1
     

What if you have unforeseen expenses? Your gift is yours to control. While you will have to name your 529 “Beneficiary” (a future college student for whom the account is intended), you, as the Account Owner, still maintain access to your assets – always – even after your Beneficiary reaches college age.  

You remain in full control of the assets in the account, and have the ability at any time to:

  • Change the Beneficiary
  • Change investment options2
  • Change Account Owner (transfer ownership of the account to someone else)
  • Transfer some/all of the assets to another existing 529 account
  • Roll over assets to another 529 plan3
  • Make withdrawals1
     
Gifting strategies – maximize your contributions

Strategy #1: Use your annual gift tax exclusion

Your 529 contributions qualify for your $14,000 annual gift tax exclusion. This exclusion is per filer, per Beneficiary. For example, if you are married, filing jointly, and you have three grandchildren, you could “gift” $84,000 per year, without triggering federal gift tax.4

 

TaxpayerGrandchild #1Grandchild #2Grandchild #3Totals
Grandfather (529 Plan Account Owner)$14,000$14,000$14,000$42,000
Grandmother (Account Owner's Spouse)$14,000$14,000$14,000$42,000
Totals$28,000$28,000$28,000$84,000

 

Strategy #2: Increase your contributions, not your gift tax – accelerated gifting

A special provision in the tax code allows you to make up to five years’ worth of contributions to a 529 plan in a single year without creating a federally taxable gift. This effectively allows you to “borrow” from future years’ gift tax exclusions – which means you can make five years' worth of contributions in a single year, without being subject to federal gift tax.5

For instance, if you are married, filing jointly, and you have three grandchildren, you could “gift” $420,000 in a single year, without triggering gift tax.

 

Tax YearTaxpayerGrandchild #1Grandchild #2Grandchild #3Totals
Year 1Grandfather & Grandmother (529 Plan Account Owner & Spouse)$28,000$28,000$28,000$84,000
Year 2Grandfather & Grandmother (529 Plan Account Owner & Spouse)$28,000$28,000$28,000$84,000
Year 3Grandfather & Grandmother (529 Plan Account Owner & Spouse)$28,000$28,000$28,000$84,000
Year 4Grandfather & Grandmother (529 Plan Account Owner & Spouse)$28,000$28,000$28,000$84,000
Year 5Grandfather & Grandmother (529 Plan Account Owner & Spouse)$28,000$28,000$28,000$84,000
Totals $140,000$140,000$140,000$420,000

Strategy #3: Maximize your benefit – the lifetime gift tax credit

To take fullest advantage of your gift tax credits, consider using your unified estate and lifetime gift tax credit. Currently worth $5.45 million, this federal tax credit would enable you to contribute even more to your Beneficiaries' accounts.  

For example, if you have three grandchildren, you could fully fund 529 plan accounts in a single year for all three – “gifting” $1,200,000 – and still not trigger federal gift tax.6 If you had nine grandchildren, you could fully fund 529 plan accounts for all nine, and still be under your $5.45 million lifetime exclusion amount.

 

TaxpayerGrandchild #1Grandchild #2Grandchild #3Totals
Grandfather (529 Plan Account Owner)$400,000$400,000$400,000$1,200,000

Consult a tax professional to ensure that this strategy is a sound choice for you.

 

Work with a financial advisor for sound guidance.

A trusted financial advisor has the investment expertise and market perspective to help you achieve your college funding goals and provide a clear understanding of 529 plan features.
 


1 Regarding non-qualified withdrawals, Distributions that are made for reasons other than “qualified expenses” are subject to ordinary income tax, plus a 10% additional federal penalty on the earnings portion of the withdrawal, payable by the Distributee.

2 Allowed twice per calendar year.

3 Allowed once every 12 months, from the time of the last rollover.

4 This tax planning strategy assumes no other gifts are being made to the Beneficiary by the Account Owner in the same calendar year.

5 Contributions to an account for a Beneficiary between $14,000 and $70,000 made in a single calendar year can be prorated over a 5-year period without incurring federal gift taxes or reducing an investor’s unified estate and lifetime gift tax credit. However, if the Account Owner dies before the fifth year, a prorated portion of the contribution will be included in his or her taxable estate.

6 $400,000 is the current maximum aggregate account balance limit allowed by all Account Owners for any one Beneficiary through Colorado-sponsored 529 plans (e.g., Legg Mason’s Scholars Choice Program). Account balances can grow beyond that amount through investment earnings, but you cannot make additional contributions once the account balance reaches $400,000.


Related Literature

New Account Application

Scholars Choice New Account Application

Scholars Choice New Account Application.


College
Savings

Think college financing is complicated? Get past all the confusion by understanding both your savings and funding options. Our innovative tools and thorough guidelines can educate you, simply and clearly.

IMPORTANT INFORMATION: An investor should consider the Program’s investment objectives, risks, charges and expenses before investing. The Program Disclosure Statement, which contains more information, should be read carefully before investing. If an investor and/or an investor’s beneficiary are not Colorado taxpayers, they should consider before investing whether their home states offer 529 plans that provide state tax and other benefits such as financial aid, scholarship funds, and protection from creditors that are only available to state taxpayers investing in such plans.

Blended Benchmark performance is shown for illustrative purposes only. The benchmark for each Investment Option is a hypothetical blend of unmanaged indices for the underlying asset classes corresponding to the Investment Option's target allocations within each asset class.  Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.  An Investment Option's benchmark may change over time to reflect changes in an asset class benchmark, the Investment Option's underlying funds and/or the Investment Option's target allocations to such funds. When an Investment Option's benchmark changes, the benchmark’s new composition is utilized to calculate benchmark performance for periods from and after such change.  Benchmark performance for periods prior to the change is not recalculated or restated based on the benchmark’s new composition.

Investments in the Scholars Choice College Savings Program are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed by the State of Colorado, CollegeInvest, QS Investors, LLC, Legg Mason Investor Services, LLC, or Legg Mason, Inc. or its affiliates and are subject to investment risks, including loss of principal amount invested.

Legg Mason, Inc., its affiliates and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the "promotion or marketing" of the transaction(s) or matter(s) addressed by these materials to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

Scholars Choice® is a registered service mark of CollegeInvest. CollegeInvest and the CollegeInvest logo are registered trademarks. Administered and issued by CollegeInvest, State of Colorado. QS Investors, LLC is the Investment Manager and Legg Mason Investor Services, LLC is the primary distributor of interests in the Program; together they serve as Manager of the Program. QS Investors, LLC, ClearBridge Investments, LLC, Brandywine Global Investment Management, LLC, Western Asset Management Company, and Legg Mason Investor Services, LLC are Legg Mason, Inc. affiliates. Thornburg Investment Management, Inc. and Templeton Global Advisors Limited are not affiliated with Legg Mason Inc. and its affiliates. 

Audited financial statements for the Scholars Choice® College Savings Program, including balance sheets, income statements, cash flow statements, and the Management's Discussion and Analysis (MDA), may be viewed at https://www.collegeinvest.org/about-us/financial-statements