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Northwest Arkansas Estate Planning Attorneys (479) 443-0062

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Should We Set Up a 529 Plan for Our Grandchildren?

March 2, 2012 by Deb Sexton Leave a Comment

529 Plans are terrific college savings plans.  Your cash contributions can be invested as you see fit, and investments grow tax deferred.  In addition, 529 Plan distributions are  distributed for qualified college expenses tax free.

Each 529 Plan (named for the authorizing section of the Internal Revenue Code) can only have one beneficiary.  You or a trust can own the 529 Plan account and other relatives and friends can contribute to this same account.

If you have extra assets, you can superfund 529 Plans with 5 years worth of annual gift tax exemption.  Each year you have a $13,000 annual gift tax exemption.  This means that you can give up to $13,000 to as many individuals, such as grandchildren, as you would like.

“Superfunding” means that you can contribute 5 x $13,000 which is $65,000 to each grandchild’s 529 Plan at one time without gift tax and without using any unified credit exemption.  If you’re married, you can put up to $130,000 into each grandchild’s 529 Plan.  However, you can’t make any other gifts to your grandchildren during the next 5 years.

Because of this limitation, you may want to either put less in the account, so you can still make birthday and Christmas gifts, or go ahead and place a larger amount of money in the accounts using your unified credit exemption.

This year (2012),  you and your spouse can each give away up to $5 million; that’s $10 million total without paying gift taxes or any other taxes.  This is called the “unified credit exemption.”  It’s “unified” because you can give money away during your lifetime or at your death…it’s one unified exemption.  (529 Plans have asset contribution limits set by the state that runs the plan based on the projected cost of a four year private university.)

If there’s a downside to 529 Plans, it’s that you have to contribute cash and you can’t contribute investments.   Investments would need to be sold and the cash deposited in the 529 Plan and the sale may trigger income tax.

If youare interested in college planning for your grandchildren and 529 Plans to be part of your estate planning, consult with a qualified estate planning attorney.

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  • Recent Posts
Deb Sexton
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Fayetteville, AR 72703
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