If you are looking for ways to help younger generations afford a higher education while still focusing on your overall financial and estate planning goals, using a 529 college savings plan as part of your gift strategy may be a win-win.
One of the many benefits of saving for a child or grandchild's future college education with a 529 plan is that these contributions are considered gifts for tax purposes. In 2020 an individual may receive $15,000 without any gift tax consequence. If you are married then both you and your spouse can gift $15,000 each to each individual recipient you desire.
The 5-Year Election
There is a super-funding strategy allowed under the law where an individual may contribute as much as $75,000 to a 529 plan and then treat the contribution as it is spread over a five-year period. This five-year election must be reported on Form 709 for each of the five years. This allows you to shelter a large amount of assets while still retaining control of those funds in the 529 account. Keep in mind that if you change your mind and remove the funds from the account they will be added back to your taxable estate.
Taking this five-year election option is an all or nothing strategy. You cannot contribute $75,000 and attempt to elect five-year treatment for only a portion of that amount. The entire $75,000 will be included in the election and must be reported on the form 709.
Since the current lifetime exemption is $11.58 million you do not start paying gift taxes until your cumulative taxable gifts exceed that amount. For most people, the gift tax is not such an issue except for the hassle of filing the required Form 709. The same can be said for the generation skipping transfer tax that could apply to grandparents making gifts to grandchildren; however, the $15,000 annual exclusion, the five-year election and $11.58 million exemption are still available for generation skipping transfers as well.
Make sure to take note of any other gifts made during the calendar year because the $15,000 exclusion is an aggregate of all gifts made not just those contributed to a 529 plan.
One last point to make is that the donor taking the five-year election must live until January 1st of the 5th calendar year to earn the full five-year annual exclusion. If this person dies prior to that date, the prorated election amount will be included in the gross estate. Any earnings in the 529 plan will remain outside of the taxable estate.
For more information on higher education gifting strategies, contact the experienced estate planning attorneys at Stouffer Legal in the Greater Baltimore area.
