Many grandparents want to establish a college fund for their grandchildren. One way to do this is with a 529 plan. 529 plans have become to college savings what 401(k) plans are to retirement savings — an indispensable tool for helping amass money for college. That's because 529 plans offer a unique combination of benefits unmatched in the college savings world: availability to people of all income levels, professional money management, high maximum contribution limits, and generous tax advantages. Funds in a 529 plan can also be used to pay K-12 expenses, up to $10,000 per year. Yet 529 plans are increasingly being used for another purpose — estate planning. That's because the special tax rules that govern 529 plans allow grandparents to save for their grandchild's college education in a way that simultaneously pares down their estate and minimizes potential gift and estate taxes.
Estate planning framework To fully appreciate how the gift and estate tax laws favor 529 plans, it's helpful to first understand how these laws apply to other assets. For 2023, every individual has an $12,920,000 basic exclusion amount (plus any unused exclusion amount of a deceased spouse) from federal gift and estate tax. This means that if the total amount of your lifetime gifts and the value of your estate is less than $12,920,000 at the time of your death, no federal gift or estate tax will be owed. In addition to this basic exclusion amount, individuals get an annual exclusion from the federal gift tax, which is currently $17,000. This means you can gift up to $17,000 per recipient per year gift tax free. And, a married couple who elects to "split" gifts can give up to $34,000 per recipient per year gift tax free. Finally, gifts made to grandchildren (or anyone who is more than one generation below you) have special tax rules. These gifts are subject to both federal gift tax and an additional tax known as the federal generation-skipping transfer tax (GSTT). However, there are exceptions for this tax too: a lifetime exemption of $12,920,000 in 2023 (same as the basic exclusion amount) and an annual exclusion that's the same as for federal gift tax — $17,000 for individuals or $34,000 for married couples. Accelerated gifting feature of 529 plans Under special rules unique to 529 plans, you can make a lump-sum contribution to a 529 plan and avoid federal gift tax if the contribution in 2023 is less than $85,000 for individual gifts or $170,000 for joint gifts (five times the annual gift tax exclusion), and you don't make any other gifts to the same recipient in the five-year period. Essentially, you are spreading the gift over five years. You need to make a special election on your federal tax return to do this.
Example: Mr. and Mrs. Brady make a lump-sum contribution of $170,000 to their grandchild's 529 plan in Year 1, electing to spread the gift over five years. The result is they are considered to have made annual gifts of $34,000 ($17,000 per grandparent) in Years 1 through 5 ($170,000 divided by 5 years). Because the amount gifted by each grandparent is within the annual gift tax exclusion, the Bradys won't owe any gift tax (assuming they don't make any other gifts to their grandchild during the five-year period). In Year 6, they can make another lump-sum contribution and repeat the process. In Year 11, they can do so again.
Thus, 529 plans offer an opportunity for parents and grandparents to put hundreds of thousands of dollars away gift tax free to help their children and grandchildren with college costs, while paring down their estates and reducing potential estate tax liabilities. There is a caveat, however. If the donor dies during the five-year period, then a prorated portion of the contribution would be "recaptured" into the estate for estate tax purposes. Example: In the previous example, assume Mr. Brady dies in Year 2. The result is that his total Year 1 and 2 contributions ($34,000) are not included in his estate. But the remaining portion attributed to him in Years 3, 4, and 5 ($51,000) would be included in his estate. However, the contributions attributed to Mrs. Brady ($17,000 per year) would not be recaptured into the estate.
Governor Ivey recently re-appointed Ron Stokes, CPA, to the Alabama College Counts 529 Plan Board. Stokes was originally appointed to the board by then-Governor Riley in 2010. Governor Ivey has re-appointed Stokes to a full 4-year term. The Alabama College Counts 529 Plan is one of the leading college savings plan in the nation.
I am a backpacker (noun). That is, I regularly hike or travel carrying everything I may need in a backpack. I go backpacking (verb) because I love being outside and exploring areas best seen on foot. I am also a CPA (nerd) and I am forced to spend extended periods of time indoors in an office. I love backpacking. I also love (love-hate) my profession – especially when I get to help others improve their financial quality of life. It feeds my soul to be able to turn off the spreadsheets, throw on my backpack and head into the wilderness.
In early August, I traveled to northern Belize for phase 2 of the financial stewardship and reporting project. I worked one-on-one with five parochial schools and the general manager’s administrative office to finish building an accounting and financial reporting system using QuickBooks software. These schools are in the Orange Walk Town and Corozal areas of Belize. On average, the schools have approximately 110 students and New Life Elementary School has almost 250 students. Only five years ago, New Life School had to close due to lack of financial support. Through the leadership of principal Ruth Ku, the community of Orange Walk, and The Belize Project in Nashville, the school is now full of students, the teachers are getting paid to serve, and the building itself is a striking presence! With a financial accounting and reporting system in place, the schools can more effectively manage resources and can apply for much needed grants from the government of Belize. I am humbled to serve the wonderful people of Belize and I look forward to a long-standing relationship with the schools as they grow and prosper.