Using a 529 Plan for estate planning

For affluent parents and grandparents, 529 plans are synonymous with college planning, but they can offer a variety of potential benefits that go beyond their traditional role. In fact, a 529 plan can be a worthwhile estate planning tool for physicians looking to reduce the size of their taxable estate while maintaining control of their assets.

Using a 529 Savings Plan to Save for College

529s are first and foremost a college savings tool. College savings plans come in two forms: prepaid college tuition plans or 529 savings plans. The former allows you to lock in today’s tuition rates, while the latter allows you to choose from a selection of investment choices depending on your personal preference. 529 savings plans are state sponsored but administered by one or more investment companies. Keep in mind, you aren’t limited to the plans in your home state. You can participate in national plans sponsored by other states as well. When making this choice, check into any tax advantages your state may offer if you utilize the 529 plan sponsored by your home state.

There are a number of benefits that make 529 plans appealing, but the most popular perks include:

• They allow investment earnings to potentially grow while remaining sheltered from federal (and possibly state) income taxes.
• Withdrawals made for qualified purchases (related to higher education) are made income-tax free.
• In some states, contributions can be used to lower state taxable income.
• Eligibility to contribute to a 529 plan is not limited by age or income (a plus for high-earners).
• Funds can be used to pay for tuition and fees for undergraduate school, graduate school, or tuition at an elementary or secondary public, private, or religious school.

Withdrawals that do not fall under the IRS’s definition of "qualified education expenses" are subject to ordinary federal and state income taxes and may be subject to a 10% additional federal tax penalty unless a specified exception applies.

Using Your 529 to Reduce the Size of the Taxable Estate

It’s clear to see why 529s are often the preferred method for college savings, but how about the role they can play in limiting estate taxes? What’s little known to many investors is how 529s can support a long-term gifting strategy that allows donors to maintain control over the assets while also removing them from their taxable estate.

Here’s how it works.

• Contributions made to 529 plans are considered gifts from the donor to the beneficiary, despite the accountholder’s authority over the money in the account.
• Federal tax law allows individuals to give up to $15,000 (indexed to inflation) tax-free to as many individuals as they choose each year (up to $30,000 for couples).
• Scheduling gifts up to these tax-free limits each year reduces the taxable estate.

Parents and grandparents, then, can make scheduled gifts up to the tax-free limit each year, gifting $15,000 to each grandchild (and/or great grandchild) on an annual basis.

But what if you need a bigger impact on a shorter time frame? Luckily, gifting can be accelerated to accommodate. Individuals can elect to make a lump-sum contribution of five years’ worth of gifts, or $75,000 in one year, tax-free. Of course, any other gifts made outside the 529 in those five years (to the same individuals) will count toward this allowance, so be sure not to exceed the threshold unless you’re prepared to potentially pay gift taxes on the excess amount.

The wealth transfer potential here is unmatched by virtually any other savings tool available. An individual who has four grandchildren, for example, could immediately remove up to $300,000 from his or her taxable estate by contributing the money to four separate 529 plan accounts. Every five years, this process can be repeated. And if the donor is married, the spouse can follow the same strategy.

Again, it’s worth stressing that the assets gifted into the 529 remain in the control of the accountholder, not the beneficiary. There will be no need to worry about the beneficiary using the funds without your express involvement in or oversight of the withdrawal. The accountholder also can change the beneficiary of the account if desired to any first degree relative of the original beneficiary (e.g., sibling, cousin, etc.) making these very flexible investment vehicles while still remaining outside of the donor’s estate.

Including 529s in Your Gifting and Estate Planning Strategy

Beyond their place in college planning, state-sponsored 529 college savings plans have the potential to double as high-powered estate planning tools for affluent physicians and their families.

_{About the Authors}

_{Julianne F. Andrews, MBA, CFP®, AIF® began her career in financial planning in 1988 and co-founded Atlanta Financial Associates in 1992, merging into Mercer Advisors in 2020. She specializes in working with physicians and executives in the healthcare industry. Her passion for working with physicians comes from being a pediatrician’s spouse for more than three decades. Julie has been featured on Forbes’ list of America’s Top Women Wealth Advisors since 2017 as well as Forbes’ Best-in-State Wealth Advisors since 2018. Julie can be reached at [email protected].}

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_{All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors.}

_{The ranking of the Forbes “Top Women Wealth Advisors” and “Best-In-State Wealth Advisors,” was developed by SHOOK Research and is based on in-person and telephone due diligence meetings to evaluate each advisor qualitatively, a major component of a ranking algorithm that includes: client retention, industry experience, review of compliance records, firm nominations; and quantitative criteria, including: assets undermanagement and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary, and advisors rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC and not indicative of future performance or representative of any one client’s experience. Neither Forbes nor SHOOK Research receive compensation in exchange for placement on the ranking. For more information: www.SHOOKresearch.com.}

_{Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. All expressions of opinion reflect the judgment of the author, are as of the date of publication, and are subject to change. The information discussed is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Due to various factors, including changing applicable laws, the content may no longer be reflective of current opinions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Mercer Advisors. Mercer Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.}