529 Plan and College Savings

Question: Disadvantage of 529 Plan?

Everyone says a college 529 Plan is a great estate planning tool. But if the goal is to minimize estate taxes, aren’t I better off plowing my annual gift limit into an UGMA account – knowing that when tuition comes due I can pay that directly and it wont count toward the gifting limit?

Answer: You are correct you have at least 3 choices.

1. Wait til child enters college and pay tuition directly to school. All of this money would be after-tax money.

2. Put up to $13,000 a year into an UGMA. Let the child pay the taxes each year on any income, but no penalty if they don’t go to college.

For either option 1 or 2, if the child does go to college, the tuition money is eligible for the education credit.

3. Put up to $13,000 a year into a 529 (while you can put up to 5 years at a time into the account, if you die before the 5 years are up, the prorata amount is added back to the estate). If the child goes to college, funds including earnings are not taxes….but tuition money cannot be used simultaneously for an education credit. (In reality, if the tuition is less than the credit, the child will often pay the income tax anyway if the credit is worth more than they’ll pay.) If the child doesn’t go to college, they can have the money, but the earnings are taxed and there is a 10% penalty.

Note, my relative did the 529s. He *wanted* the money to be tied up in the child’s name for college and out of his estate. Only 1 of his grandchildren was in college when he died…

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