With higher education costs outpacing inflation by 5-6% per year, and the average cost of a four-year public school at nearly $20,000 per year (double that for private schools) it’s no surprise that many parents and grandparents are deeply concerned about how they will pay for higher education. Many of these clients are similarly concerned about estate planning.
One tool that can accomplish both is a college savings plan commonly known as a 529 plan (named after the Internal Revenue Code section that creates them). Contributions to 529 plans are generally not subject to gift, estate or GST tax, gains are not subject to income tax if used for qualified higher education expenses (QHEEs), and these assets are not owned by the student for financial aid purposes, making them an excellent tool for saving for college.
Furthermore, you can ‘front-load’ a 529 plan by contributing five years’ worth of gift tax annual exclusions (currently $13,000 per year, or $65,000 per person) free of gift and estate tax as long as the contributor lives at least five years. Thus, a married couple can contribute up to $130,000 per child or grandchild!
The downsides to 529 plans are gains are subject to tax if not used for QHEEs and there are generally limited investment options, similar to mutual funds. There are also high fees with some state’s 529 plans, so it’s worth some research. An excellent resource in this area is the website savingforcollege.com.
One key consideration is the particular 529 plan’s impact on state income tax: is the client eligible for a state income tax deduction for investing in his or her state’s 529 plan?
A good client-focused article on 529 plans’ utility for estate planning is Pros, Cons Of 529 Plans For Sophisticated, Affluent Parents, available online at http://news.investors.com/Article/600061/201202031828/strengths-and-weaknesses-of-529-plans.htm.