529 Plan Options

529 Plan Options

By: Martin M. Shenkman, CPA, MBA, JD

You can contribute to state-run college education savings programs (529 Plans) to fund educational costs for heirs. Money saved in these programs can be used to pay for tuition, room and board, and similar expenses. And, so long as the income generated by money already in a 529 account is used for higher education expenses, it will not be subject to income tax. These plans can be set up for almost any family member, including son, daughter, grandchildren, brother, sister, nephew, niece, certain in-law, and spouse.

It is also possible to change the beneficiary of a 529 plan without losing the tax benefits. As long as the new beneficiary is related to the old beneficiary, and the money is still used towards educational purposes, there should be no issues.

College savings plans are touted, often appropriately, for their tax deferral, and other benefits of saving for college costs. But are they really right for you? If you are concerned about asset protection, estate taxes, control and other issues, you might have better options than a 529 plan. Look at your overall estate plan. If setting up a family limited partnership or limited liability company to hold family assets is appropriate to your plan, then making gifts to a trust for your child rather than a 529 plan might be a much better result. The child's trust can then invest in, and become a partner or member in the family entity.

If you're wealthy, your family might benefit more if, as part of an overall financial, asset protection and estate planning strategy you establish trusts for your children and grandchildren. You can gift interests to them in family businesses, or through investments at a discount. 529 trusts also allow you to fractionalize ownership of family entities, remove future appreciation from your estate, and achieve other goals. You can, at these levels, always pay for tuition costs directly over and above the annual gifts you can make to the trusts (currently $12,000 per year). While 529 plans offer significant tax benefits, when the overall family goals and objectives are considered, they are not always the best option.

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