529 Plan and College Savings

Posts Tagged ‘529 plan’

Question: Estate and Gift Tax benefits on 529 Plan.?

On the Arkansas Vanguard Gift 529 Plan, it states that contributions of 60K per child (120K if joint filing used) made in a single year allows for 5yrs worth of federal tax-free gifts at one time. This is prorated over five years. Can someone please explain the benefits (federal tax-free gifts?)

Answer: If a gift of $60,000 is made in one year the donor would file a gift tax return, form 709, and elect by checking the box on page two to spread the gift over a five year period. This allows you to make five years worth of gifts in one year without incurring a gift tax or using part of the $1,000,000 lifetime gift exclusion.
If the person making the gift dies within the five years their estate would report the gift amount representing $12,000 times the number of years left in the five year period. If they die in year two then $36,000 is reported by their estate. If they die in year four then $12,000 is reported.
By making gifts this amount is out of their estate and would not be subject to estate tax at their death.
Annual gifting works like compound interest, if it is done consistently a large amount of wealth can be transferred to the next generation outside of the estate tax regime. Gifting can keep a non-taxable estate from becoming a taxable estate. It can help family members now when they may need help the most. In the case of the 529 account it transfers a large amount that is invested for a longer period and help accumulate more income that may never be taxable.
Good Luck!

Estate Planning – Spotlight November 2009