By Steven R. Latterell, Ice Miller LLP
A 2018 survey conducted by Edward Jones revealed that only 29 percent of Americans know 529 plan accounts are an education savings tool. So, while the sticker price for a college education continues to rise, it appears many Americans are unaware of the powerful tool available to them and their families to save to pay for this all-important expense. In particular, there are potential income tax and federal gift and estate tax benefits for those who do contribute to 529 plan accounts.
Assets contributed to 529 plan accounts grow income tax-free, and if used for the account beneficiary's qualified higher education expenses at a qualifying educational institution, they are exempt from federal income tax when later withdrawn. In addition, Indiana provides a 20 percent state income tax credit for contributions of up to $5,000 per year to an Indiana-based 529 plan account (i.e., a current maximum credit of $1,000/year).
For federal gift and estate tax purposes, a contributor can utilize the annual gift tax exclusion and give up to $15,000 per beneficiary in 2018 without incurring a gift tax liability (that amount is reduced if other gifts are made to that beneficiary in 2018). A contributor also can “pre-fund” a 529 plan account by accelerating up to five years’ gifts per beneficiary in a single year. For example, up to $75,000 could be contributed to an account in 2018. Currently, contributions may continue to an Indiana-based 529 plan account for a particular beneficiary until all account balances in Indiana’s 529 plan for that beneficiary reach $450,000. A high threshold, to say the least, even in today’s environment of escalating education costs.
The gift itself is complete when transferred and is excluded from the contributor's estate for federal estate tax purposes (although, only a pro rata portion of an accelerated gift is excluded if the contributor does not survive the five-year period). Despite that fact, 529 plan accounts offer two more flexible features, which are quite unique. First, the contributor can change the beneficiary of the account, even after the gift is completed. Second, the 529 plan accounts in many states, including Indiana, allow the contributor to cancel the gift if the contributor later wants the assets back (subject to a 10 percent penalty and income taxation on the earnings)
To be sure, making gifts to children or grandchildren through a 529 plan account can have positive income tax and federal gift and estate tax benefits for the contributor, and it comes with the added and unique benefit of gifting flexibility.
For more information, please contact Steve Latterell or another member of Ice Miller’s Trusts and Estates Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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