Estate Planning

What are the advantages to a CollegeInvest 529 to consider in your longer-term estate planning?

There are a variety of advantages when you include a CollegeInvest savings account in your longer-term estate planning. Here are some of them:

Reduced estate assets

Contributions made to a 529 plan generally aren’t considered to be part of your estate when you die (as an account owner). Their value will then be included in the beneficiary’s estate.

Your grandchild benefits, but you remain in control

As the account owner you are in control of the account.  Generally, contributions to a 529 are considered completed gifts and outside of the donor’s estate. Other custodial savings vehicles relinquish control of the funds to the beneficiary when the child reaches the age of 18 or 21.

But 529s are unique in that you maintain control of the savings account during its lifetime, not the beneficiary:

• You determine the investment selections and allocations of contributions to the account,
• You name the beneficiary (only one per account), with the option to change the beneficiary (within certain restrictions) as you choose,
• You decide when and how much to withdraw to pay qualified higher education expenses, or non-qualified expenses,¹
• You decide if and when to close the account. There are no time limits to accounts so they can stay open for generations.

Large or lump-sum contributions

Contributions to a 529 qualify for the annual federal gift tax exclusion.

• As an individual, you can give up to $13,000 per beneficiary each year without incurring a gift tax or needing to report the gift on a tax return.
• Married couples can contribute a total of $26,000 per beneficiary.²
• You can contribute to as many individuals, or beneficiaries, as you like, gift tax free.

But note: Grandparents are also subject to the federal Generation-Skipping Transfer Tax, known as the GSTT. This is a tax on transfers made during your life and at your death to someone who is more than one generation below you, such as a grandchild. This tax is imposed in addition to the federal and state gift taxes.

As of 2009 however, there is a $3.5 million exemption and no GSTT will be due until you have used up the GSTT exemption. And no gift tax will be due until you’ve used up your applicable exclusion amount.

Accelerated contributions

There is an accelerated gift option that allows a donor to average gifts that exceed the limits over a five-year period without incurring federal gift tax.

This allows the donor to give up to $65,000 per beneficiary in a single year ($130,000 for a married couple through gift-splitting).²

For Example:

Grandma and Grandpa Davis make a $120,000 lump-sum contribution to their granddaughter’s 529 account in Year one. They are considered to have made annual gifts of $24,000 (as a couple) in Years one through five. Because the annual amount is less than the annual gift tax exclusion, they don’t owe any gift taxes.

They could continue this process in Year six and Year eleven if they wish.

AND, they can do this for as many beneficiaries as they have accounts.

If the donor dies during the five year gift tax averaging period, a pro-rata portion of the gift will be included in the donor's gross estate based on the number of years remaining in the five year period (not including the year in which the donor died).

Any additional gifts you make for the same beneficiary in that same year or the next four years may be subject to gift or the GSTT in the calendar year of the gift.

A word of caution

Estate, gift, and generation-skipping tax issues arising in connection with 529 Plans can be quite complicated. You and the Beneficiary should consult with a qualified tax advisor or specialist regarding these issues and the specific application of these rules to their particular circumstances.

 ¹ The earnings portion of a non-qualified withdrawal is subject to federal income taxes and any applicable state income tax, as well as an additional 10% federal penalty tax. Contributions for which a Colorado income tax deduction was taken are subject to recapture in subsequent years in which non-qualified withdrawals are made.

 ² Contributions between $13,000 and $65,000 made in one year can be prorated over a five-year period without incurring federal gift taxes or reducing your unified estate and gift tax credit. If the account owner dies before the end of the five-year period, a prorated portion of the contribution will be included in his or her taxable estate. If you contribute less than the $65,000 maximum, additional contributions can be made without incurring federal gift taxes, up to a prorated level of $13,000 per year. Federal gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given student in the year of contribution.

Important Considerations

To learn about CollegeInvest’s 529 program, its objectives, risks, charges, expenses, limitations, restrictions and qualifications regarding the Plans’ benefits and potential tax advantages, please read and consider carefully the Program Disclosure Statements (PDS) available at www.collegeinvest.org before investing. Also, check with your or your beneficiary’s home state to learn if it offers tax or other benefits for investing in its own plan. Administered and issued by CollegeInvest.

CollegeInvest and the CollegeInvest logo are registered trademarks of CollegeInvest.