using 529 primarily as estate planning vehicle?
Let’s say I have significant taxable money to save each year (after maxing various retirement plans).
What if I fill the 529s that my kids own, to the maximum allowed by each plan, with the express purpose of fully funding college and/or graduate school, but also knowing that I will probably be overfunding the accounts; and then planning to leave all that ‘extra’ money in the 529s until my wife and I die? What happens to the 529s upon our deaths, if our children (who have been the beneficiaries of the plans) later become the adult successor owners? Estate taxes, generation-skipping taxes? Can the then-adult kids name their children (our grandchildren) as beneficiaries? Is that a taxable event?
The rationale for this would be a) reducing taxable estate; b) providing many decades of tax-deferred growth; c) tax- and penalty-free growth if used for qualified educational expenses; d) some asset protection (dependent on state law). The quirky thing about doing this would be doing it at a young age – kids are very young and we are in our 30s.
The alternative is straight taxable investing. I have found a few online articles about this strategy but the articles are dated and also geared toward older investors whose estate planning needs are more pressing.
Appreciate your thoughts.
Permalink Submitted by mk foss on Wed, 2012-02-15 18:08
The maximum allowed by each planh isn’t a huge amount of money – maximums were about $250k the last time I checked. You will incur gift taxes if you fund the 529 plans with more than your annual exclusions – you can front load 5 years at a time but amounts in excess of 5 times the annual exclusion are subject to gift tax. Those taxable gifts are part of your estate for calculating the unifed estate tax. If you were to pass away before all of the gifts in a 5 year string have been treated as gifts, the unreported gits are part of your estate. If a 529 beneficiary passes away, the 529 plan assets are included in their estate. That tax would be avoided by the beneficiary transferring the account to another beneficary before their death.
So the 529 can be used for estate planning but it doesn’t save lots of future estate tax and takes some discipline on the part of the beneficiaries.
Permalink Submitted by robert axelrod on Wed, 2012-02-15 19:49
it doesn’t seem there is any limit to the number of 529s I can have per beneficiary. Our plans have a $350k limit; x 2 = $700k; or if several state plans then quite a bit more?
Permalink Submitted by Robert Taylor on Thu, 2012-02-16 12:06
Per current legistation, there is no rule (yet) that prevents you from contributing the maximum to multiple plans (“stacking”) in various states. Federal gifting limits and the previously stated 5 year acceleration rules still apply.
Some states require you to reveal if you are cirumventing the state limit with multiple state contribuitons.