Avoiding Tax Issues When Gifting to Grandchildren

July 2, 2024

Gifting to grandchildren is a wonderful way to share your wealth with young loved ones. Getting some help at the right time can help ensure that they enjoy a bright future. However, taxes may drastically reduce the inheritance they receive. That’s why avoiding tax issues is vital when gifting to grandchildren, so you are making the most of your legacy.

Gifting to grandchildren can be transformative for them and their future. These gifts can make a difference, whether for education, starting a business, or simple financial stability. However, making the greatest difference will require a keen understanding of estate taxes.

Before a deceased person’s estate transfers to their inheritors, the government levies estate taxes. However, many ways exist to reduce or even avoid estate taxes altogether. Estate tax law is largely progressive and provides many allowances and deductions. In particular, accounts are available to fund your beneficiaries’ educations tax-free.

According to ElderLawAnswers, 529 accounts are ideal for helping your inheritors afford education. These special savings accounts are designed for college education expenses, K-12 tuition, apprenticeship programs and student loan repayments, and they offer significant tax advantages. The money you put into a 529 account grows tax-free, and withdrawals for qualified education expenses are also tax-free.

However, the disadvantage of a 529 account is that it only covers education-related expenses. General-purpose gifting has significant limits if you want to avoid a large tax burden.

The IRS places annual limits on gifting to grandchildren, the annual gift tax exclusion. As of 2024, you can give up to $18,000 per year to each grandchild without incurring any gift taxes. If you stay within these limits, you won’t have to pay gift taxes or worry about reducing your lifetime gift and estate tax exemption.

Another strategy to reduce or avoid estate taxes is setting up a trust. You can structure trusts to manage your assets to meet specific goals. By implementing a trust, you can decide how and when your grandchildren receive their inheritance. This is particularly useful if they are young or not yet financially responsible.

There are various types of trusts to consider, such as:

Revocable Trusts: These allow you to maintain control over the assets and make changes as needed.
Irrevocable Trusts: These remove the assets from your estate, potentially reducing estate taxes. However, you cannot change the terms once it’s set up.
Education Trusts: Specifically designed to fund education expenses, similar to 529 accounts but with more flexibility.

Avoiding tax issues when gifting to your grandchildren will ease your tax burden and maximize your contributions to their future. If you would like to learn more about gifting, please visit our previous posts.

Reference: ElderLawAnswers (Jul. 12, 2018) “Using 529 Plans for a Grandchild’s Higher Education”

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529 Plans allow Grandparents to help with the Cost of College

January 25, 2024

529 plans allow grandparents to help with the cost of college for grandchildren. Helping grandchildren prepare for long-term success and easing the financial burden of college costs is a gift for two generations, as mentioned in a recent article from Kiplinger, titled “529 Plans: Give the Gift of Education (and Compounding).”

Giving cash directly to children or parents isn’t the best long-term strategy. Once the money is given, control is surrendered, and the gift may not be used as intended by the giver. Saving for college is one of the significant financial challenges parents face, especially considering the high inflation of college tuition costs. Between 2021 and 2022, U.S. college tuition rates increased by 12%.

This is where estate planning intersects with the new year. As the current historically high estate tax exemption ends at the end of 2025, managing the size of one’s estate becomes a higher priority. The structure of 529 college savings accounts can be used for tax efficiency and to control the eventual use of the gift while taking advantage of long-term compounding.

Current gift tax rules allow individuals to gift up to $18,000 per year per person. Therefore, a married couple could gift $36,000 to each child and grandchild without it counting against their lifetime exemption or requiring them to file a gift tax return. However, the 529 is even more advantageous, allowing a five-year front-loading of such gifts per recipient.

If your state has a plan, funding 529 plans offers deductions on state income taxes. If your state doesn’t have a 529 plan, you can open an account in another state but won’t receive the tax deduction.

There have always been concerns about overfunding a 529 account or having unused funds if the beneficiary decides not to attend college. Most plans allow account owners to change beneficiaries without any tax consequences as long as the new beneficiary is a member of the current beneficiary’s family. If the new beneficiary is younger than the prior one, it may be wise to change the asset allocation to reflect the new time horizon.

Another common question regards the impact gifting may have on the student’s application for federal aid. While 529 plans owned by parents are considered, 529 plans owned by grandparents are not on the FAFSA (Free Application for Federal Student Aid) form.

Changes to the original 529 structure have rendered these accounts even more valuable. The Tax Cuts and Jobs Act expanded the eligibility of 529 accounts for private and parochial K-12 schools. Then, the SECURE Act allowed 529 funds to be used to pay down up to $10,000 in student debt.

Starting in 2024, the SECURE 2.0 Act allows 529 funds to be rolled over into a Roth IRA at the annual contribution limit up to a lifetime maximum of $35,000 for a beneficiary. The account needs to be open for at least 15 years. Still, having an account grow in a tax-free environment and removing the distribution restrictions presents a valuable new investment tool.

Speak with your estate planning attorney about how 529 plans can allow grandparents to help family members with the cost of college and plan for estate taxes. If you would like to learn more about gifting and 529 plans, please visit our previous posts.

Reference: Kiplinger (Dec. 20, 2023) “529 Plans: Give the Gift of Education (and Compounding)”

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New changes to 529 Plans provide more Options

April 3, 2023

There are new changes to 529 plans that will provide more options to families. Forbes’ recent article titled “529 Plans Just Became More Flexible: Here’s Everything You Need To Know” explains that the Secure Act 2.0 changed 529 savings plans, which will make the funds easier to use when college expenses aren’t as high as planned. In addition, the law allows families to roll over up to $35,000 from a 529 plan to an IRA. However, the changes do not become permanent until 2024.

After 15 years in the plan, unused funds up to $35,000 can be rolled into a Roth IRA to save for retirement, subject to the annual IRA contribution limit. There’s also no penalty for using this money for IRA contributions instead of college expenses. Previously, a 10% penalty would have applied to the growth if funds were withdrawn for non-qualifying expenses.

There’s a 15-year waiting period, which might affect the benefit many people can get from this change. Therefore, you cannot open a 529 plan now, fund it and start moving money immediately. You have to wait at least 15 years.

The money transferred to an IRA goes to the account’s beneficiary or the student, not the account owner.

529 plan rules are created on the state level for each plan. Therefore, while federal law now allows529 plans to roll over to IRAs, your state may not conform to these rules. Currently, the 529 to IRA rollover is considered a “rollover” for tax purposes, and most states consider outbound rollovers taxable events. Therefore, states will need to update their state tax laws to conform with this new federal rule. Check your state’s law as well before you proceed with a rollover.

If you use up all the money for college, that’s super. However, if you don’t, you can transfer some money to your beneficiary’s IRA based on annual limits, until you reach the $35,000 cap. These new changes to 529 plans provide more options for families worried about saving too much money and like the idea of funneling that cash into their child’s retirement accounts instead. If you would like to learn more about college savings plans, please visit our previous posts.

Reference: Forbes (Feb. 20, 2023) “529 Plans Just Became More Flexible: Here’s Everything You Need To Know”

529 Plans are a Strategy for Estate Planning

November 28, 2022

Parents and grandparents use 529 education savings plans to help with the cost of college expenses. However, 529 plans are a helpful strategy for estate planning, according to a recent article, “Reap The Recently-Created Planning Advantages Of 529 Plans” from Forbes.

There’s no federal income tax deduction for contributions to a 529 account. However, 35 states provide a state income tax benefit—a credit or deduction—for contributions, as long as the account is in the state’s plan. Six of those 35 states provide income tax benefits for contributions to any 529 plan, regardless of the state it’s based in.

Contributions also receive federal estate and gift tax benefits. A contribution qualifies for the annual gift tax exclusion, which is $16,000 per beneficiary for gifts made in 2022. Making a contribution up to this amount avoids gift taxes and, even better, doesn’t reduce your lifetime estate and gift tax exemption amount.

Benefits don’t stop there. If it works with the rest of your estate and tax planning, in one year, you can use up to five years’ worth of annual gift tax exclusions with 529 contributions. You may contribute up to $80,000 per beneficiary without triggering gift taxes or reducing your lifetime exemption.

You can, of course, make smaller amounts without incurring gift taxes. However, if this size gift works with your estate plan, you can choose to use the annual exclusion for a grandchild for the next five years. Making this move can remove a significant amount from your estate for federal estate tax purposes.

While the money is out of your estate, you still maintain some control over it. You choose among the investment options offered by the 529 plan. You also have the ability to change the beneficiary of the account to another family member or even to yourself, if it will be used for qualified educational purposes.

The money can be withdrawn from a 529 account if it is needed or if it becomes clear the beneficiary won’t use it for educational purposes. The accumulated income and gains will be taxed and subject to a 10% penalty but the original contribution is not taxed or penalized. It may be better to change the beneficiary if another family member is more likely to need it.

As long as they remain in the account, investment income and gains earned compound tax free. Distributions are also tax free, as long as they are used to pay for qualified education expenses.

In recent years, the definition of qualified educational expenses has changed. When these accounts were first created, many did not permit money to be spent on computers and internet fees. Today, they can be used for computers, room, and board, required books and supplies, tuition and most fees.

The most recent expansion is that 529 accounts can be used to pay for a certain amount of student debt. However, if it is used to pay interest on a loan, the interest is not tax deductible.

Finally, a 2021 law made it possible for a grandparent to set up a 529 account for a grandchild and distributions from the 529 account are not counted as income to the grandchild. This is important when students are applying for financial aid; before this law changed, the funds in the 529 accounts would reduce the student’s likelihood of getting financial aid.

Two factors to consider: which state’s 529 is most advantageous to you and how it can be used as part of a strategy for your estate planning. If you would like to learn more about 529 plans, please visit our previous posts.

Reference: Forbes (Oct. 27, 2022) “Reap The Recently-Created Planning Advantages Of 529 Plans”

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A Few Ways to Transfer Home to Your Children

November 16, 2022

There are a few ways to transfer your home to your children. Kiplinger’s recent article entitled “2 Clever Ways to Gift Your Home to Your Kids” explains that the most common way to transfer a property is for the children to inherit it when the parent passes away. An outright gift of the home to their child may mean higher property taxes in states that treat the gift as a sale. It’s also possible to finance the child’s purchase of the home or sell the property at a discount, known as a bargain sale.

These last two options might appear to be good solutions because many adult children struggle to buy a home at today’s soaring prices. However, crunch the numbers first.

If you sell your home to your child for less than what it’s worth, the IRS considers the difference between the fair market value and the sale price a gift. Therefor., if you sell a $1 million house to your child for $600,000, that $400,000 discount is deemed a gift. You won’t owe federal gift tax on the $400,000 unless your total lifetime gifts exceed the federal estate and gift tax exemption of $12.06 million in 2022, However, you must still file a federal gift tax return on IRS Form 709.

Using the same example, let’s look at the federal income tax consequences. If the parents are married, bought the home years ago and have a $200,000 tax basis in it, when they sell the house at a bargain price to the child, the tax basis gets split proportionately. Here, 40% of the basis ($80,000) is allocated to the gift and 60% ($120,000) to the sale. To determine the gain or loss from the sale, the sale-allocated tax basis is subtracted from the sale proceeds.

In our illustration, the parent’s $480,000 gain ($600,000 minus $120,000) is non-taxable because of the home sale exclusion. Homeowners who owned and used their principal residence for at least two of the five years before the sale can exclude up to $250,000 of the gain ($500,000 if married) from their income.

The child isn’t taxed on the gift portion. However, unlike inherited property, gifted property doesn’t get a stepped-up tax basis. In a bargain sale, the child gets a lower tax basis in the home, in this case $680,000 ($600,000 plus $80,000). If the child were to buy the home at its full $1 million value, the child’s tax basis would be $1 million.

Another way to transfer your home to your children is to combine your bargain sale with a loan to your child, by issuing an installment note for the sale portion. This helps a child who can’t otherwise get third-party financing and allows the parents to charge lower interest rates than a lender, while generating some monthly income.

Be sure that the note is written, signed by the parents and child, includes the amounts and dates of monthly payments along with a maturity date and charges an interest rate that equals or exceeds the IRS’s set interest rate for the month in which the loan is made. Go through the legal steps of securing the note with the home, so your child can deduct interest payments made to you on Schedule A of Form 1040. You’ll have to pay tax on the interest income you receive from your child.

You can also make annual gifts by taking advantage of your annual $16,000 per person gift tax exclusion. If you do this, keep the gifts to your child separate from the note payments you get. With the annual per-person limit, you won’t have to file a gift tax return for these gifts. If you would like to learn more about managing property in your estate planning, please visit our previous posts.

Reference: Kiplinger (Dec. 23, 2021) “2 Clever Ways to Gift Your Home to Your Kids”

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What is the Best Way to Leave Money to Children?

June 13, 2022

Parents and grandparents want what’s best for children and grandchildren. We love generously sharing with them during our lifetimes—family vacations, values and history. If we can, we also want to pass on a financial legacy with little or no complications, explains a recent article titled “4 Tax-Smart Ways to Share the Wealth with Kids” from Kiplinger. What is the best way to leave money to children?

There are many ways to transfer wealth from one person to another. However, there are only a handful of tools to effectively transfer financial gifts for future generations during our lifetimes. UTMA/UGMA accounts, 529 accounts, IRAs, and Irrevocable Gift Trusts are the most widely used.

Which option will be best for you and your family? It depends on how much control you want to have, the goal of your gift and its size.

UTMA/UGMA Accounts, the short version for Uniform Transfers to Minor or Uniform Gift to Minor accounts, allows gifts to be set aside for minors who would otherwise not be allowed to own significant property. These custodial accounts let you designate someone—it could be you—to manage gifted funds, until the child becomes of legal age, depending on where you live, 18 or 21.

It takes very little to set up the account. You can do it with your local bank branch. However, the funds are taxable to the child and if an investment triggers a “kiddie tax,” putting the child into a high tax bracket and in line with income tax brackets for non-grantor trusts, it could become expensive. Your estate planning attorney will help you determine if this makes sense.

What may concern you more: when the minor turns 18 or 21, they own the account and can do whatever they want with the funds.

529 College Savings Accounts are increasingly popular for passing on wealth to the next generation. The main goal of a 529 is for educational purposes. However, there are many qualified expenses that it may be used for. Any income from transfers into the account is free of federal income tax, as long as distributions are used for qualified expenses. Any gains may be nontaxable under local and state laws, depending on which account you open and where you live. Contributions to 529 accounts qualify for the annual gift tax exclusion but can also be used for other gift and estate tax planning methods, including letting you make front-loaded gifts for up to five years without tapping your lifetime estate tax exemption.

You may also change the beneficiary of the account at any time, so if one child doesn’t use all their funds, they can be used by another child.

From the IRS’ perspective, a child’s IRA is the same as an adult IRA. The traditional IRA allows an immediate deduction for income taxes when contributions are made. Neither income nor principal are taxed until funds are withdrawn. By contrast, a Roth IRA has no up-front tax deduction. However, any earned income is tax free, as are withdrawals. There are other considerations and limits. However, generally speaking the Roth IRA is the preferred approach for children and adults when the income earner expects to be in a higher tax bracket when they retire. It’s safe to say that most younger children with earned income will earn more income in their adult years.

The most versatile way to make gifts to minors is through a trust. This is perhaps the best way to leave money to children. There’s no one-size-fits-all trust, and tax rules can be complex. Therefore, trusts should only be created with the help of an experienced estate planning attorney. A trust is a private agreement naming a trustee who will manage the assets in the trust for a beneficiary. The terms can be whatever the grantor (the person creating the trust) wants. Trusts can be designed to be fully asset-protected for a beneficiary’s lifetime, as long as they align with state law. The trust should have a provision for what will occur if the beneficiary or the primary trustee dies before the end of the trust. If you would like to learn more about how to leave money, or an inheritance, to your children, please visit our previous posts.

Reference: Kiplinger (May 15, 2022) “4 Tax-Smart Ways to Share the Wealth with Kids”

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Trusts are Best for Gifting to Minors

April 6, 2022

How gifts are made could have major impacts on heirs, especially if the recipient is a minor. There are many drawbacks to gifting outright, including limited control over gifts, exposure to creditors, divorce and litigation. Trusts are the best strategy for gifting to minors, as discussed in the article “The Annual Exclusion For Gift Taxes Has Increased to $16,000—What Issues Should I Consider” from Mondaq.

When gifting directly to minors, a custodial account (ITMA) offers some structure. However, if the account terminates when the minor becomes of age, you then have a young person with no control and a lot of money. This is usually a bad combination.

For example, what if the annual exclusion gift of $16,000 is placed into a custodial account when the heir is nine and ends when the heir celebrates their 18^th birthday? Even if the account earns no interest, by the time the heir reaches age 18, they will have complete access to $160,000 with no restrictions.

If there is a change to the custodian before the minor comes of legal age, the UTMA allows a primary custodian to name a successor. However, if this does not happen, the process of naming a successor custodian is generally burdensome and expensive.

Trust options or a transfer to a 529 plan are better options offering a lot more control by a trustee. Trusts allow assets to be used for a variety of needs, while the 529 plan limits withdrawals to be used for educational needs. The trustee may also continue to manage the account long after the heir has reached legal age, which to most people makes good sense.

Another option is a Section 2503(c) Minors Trust, which can be used for annual exclusion gifts to minors. They require that assets of the trust be applied for the minor who is a beneficiary of the trust. However, there are limited exceptions. There can only be one beneficiary and they must be under age 21. When the beneficiary turns twenty-one, they must be given the ability to withdraw the assets. However, any assets remaining in the trust can be kept in the trust and the trust itself can be converted into another form of irrevocable trust, allowing for continued annual exclusion gifts to be made for the beneficiary.

For more control, consider an irrevocable gift trust. The IGT can be used for the annual exclusion gift and is a smart choice for gifts greater than the annual exclusion when a Gift Tax Return is required. The person creating the irrevocable gifting trust appoints the trustees and should name alternates, if the primary trustee is unable to serve. The trustee then has discretion to manage the assets, including over distributions. Unlike a 2503(c) Minor Trust, the irrevocable gifting trust does not have to terminate or permit unrestricted access to income or principal. Wanting to make sure your loved ones receive those special gifts is a wonderful thing. Trusts are the best option to consider for gifting to minors. If you would like to learn more about gifting in estate planning, please visit our previous posts.

Reference: Mondaq (March 2022) “The Annual Exclusion For Gift Taxes Has Increased to $16,000—What Issues Should I Consider”

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A lot of Flexibility in 529 Education Plans

November 3, 2021

Statecollege.com’s recent article entitled “Did You Know 529s Are Powerful Estate Planning Tools?” explains that specialized savings accounts, informally referred to as 529s, could be at the top of your list. There is a lot of flexibility in 529 education plans. These accounts have a number of advantages for beneficiaries. There are also benefits for the donors in the high maximum contribution limits and tax advantages.

Special tax rules governing these accounts let you decrease your taxable estate. That might minimize future federal gift and estate taxes. In 2021, the lifetime exclusion is now $11.7 million per person, so most of us don’t have to concern ourselves with our estates exceeding that limit. However, remember that the threshold will revert back to just over $5 million per person in 2026.

Under the rules that govern 529s, you can make a lump-sum contribution to a 529 plan up to five times the annual limit of $15,000. As a result, you can give $75,000 per recipient ($150,000 for married couples), provided you document your five-year gift on your federal gift tax return and don’t make any more gifts to the same recipient during that five-year period. You can, however, go ahead and give another lump sum after those five years are through. The $150,000 gift per beneficiary won’t have a gift tax, as long as you and your spouse follow the rules.

Many people think that gifting a big chunk of money in a 529 means they’ll irrevocably give up control of those assets. However, a lot of the flexibility in 529 education plans is allowing you to have considerable control—especially if you title the account in your name. At any time, you can get your money back, but it will be part of your taxable estate again subject to your nominal federal tax rate. There’s also a 10% penalty on the earnings portion of the withdrawal, if you don’t use the money for your designated beneficiary’s qualified education expenses.

If your chosen beneficiary doesn’t need some or all of the money you’ve put in a 529, you can earmark the money for other types of education, like graduate school. You can also change the beneficiary to another member of the family as many times as you like. This is nice if your original beneficiary chooses not to go to college at all.

In addition, you can take the money and pay the taxes on any gains. Normally, you’d also expect to pay a penalty on the earnings but not for scholarships. The penalty is waived on amounts equal to the scholarship, provided they’re withdrawn the same year the scholarship is received, effectively turning your tax-free 529 into a tax-deferred investment. You can always use the money to pay for other qualified education expenses, like room and board, books and supplies. If you are interested in learning more about 529 education plans, please visit our previous posts.

Reference: statecollege.com (Aug. 29, 2021) “Did You Know 529s Are Powerful Estate Planning Tools?”

Many Benefits of 529 Plans

September 22, 2021

There are many benefits of 529 college saving plans. You might think that tax-deferred savings is the main benefit, along with tax-free withdrawals for qualifying higher education expenses. However, there are also state tax incentives, such as tax deductions, credits, grants, or exemption from financial aid consideration from in-state schools in certain states.

Forbes’ recent article entitled “7 Benefits You Didn’t Know About 529 College Savings Plans (But Should)” says there are many more advantages to the college savings programs than simple tax benefits.

1) Registered Apprenticeship Programs Qualify. You can make qualified withdrawals from a 529 plan for registered apprenticeship programs. These programs cover a wide range of areas with an average annual salary for those that complete their apprenticeship of $70,000.

2) International Schools Usually Qualify. More than 400 schools outside of the US are considered to be qualified higher education institutions. You can, therefore, make tax-free withdrawals from a 529 plan for qualifying expenses at those colleges.

3) Gap Year and College Credit Classes for High School. Some gap year programs have partnered with higher education institutions to qualify for funding from 529 accounts. This includes some international and domestic gap year, outdoor education, study-abroad, wilderness survival, sustainable living trades and art programs. Primary school students over 14 can also use 529 funds for college credit classes, where available.

4) Get Your Money Back if Not Going to College. If your beneficiary meets certain criteria, it’s possible to avoid a 10% penalty and changing the plan from tax-free to tax-deferred. For this to happen, the beneficiary must:

Receive a tax-free scholarship or grant
Attend a US military academy
Die or become disabled; or
Get assistance through a qualifying employer-assisted college savings program.

Note that 529 plans are technically revocable. Therefore, you can rescind the gift and pull the assets back into the estate of the account owner. However, there are tax consequences, including tax on earnings plus a 10% penalty tax.

5) Private K–12 Tuition Is Qualified. 529 withdrawals can be used for up to $10,000 of tuition expenses at private K–12 schools. However, other expenses, such as computers, supplies, travel and other costs are not qualified.

6) Pay Off Your Student Loans. If you graduate with some money leftover in a 529 account, it can be used for up to $10,000 in certain student loan repayments.

7) Estate Planning. Contributions to a 529 plan are completed gifts to the beneficiary. These can be “superfunded” for up to $75,000 per beneficiary in a single year, effectively using five years’ worth of annual gift tax exemption up front. For retirees with significant RMDs (required minimum distributions) from qualified accounts, such as 401(k)s and traditional IRAs, the 529 plan offers high contribution limits across multiple beneficiaries, while retaining control of the assets during the lifetime of the account owner. Assets also pass by contract upon death, avoiding probate and estate tax.

Work closely with your financial advisor and estate planning attorney to ensure you are getting the most benefits out of your 529 college saving plans.

If you would like to read more about 529 plans, please visit our previous posts.

Reference: Forbes (July 15, 2021) “7 Benefits You Didn’t Know About 529 College Savings Plans (But Should)”

More Pluses than Minuses in 529 Plans

July 21, 2021

There are two basic types of 529 plans, says Texas News Today’s recent article entitled “What you need to know about the “529” Education Savings Account.” The more common type is the 529 College Savings Plan. This allows parents, grandparents and others to invest money to cover eligible education for beneficiaries. The less common type is the 529 prepaid tuition program, in which tuition is paid at a set price. Overall, there are more pluses than minuses in a 529 college savings plan. Here is how it works.

Contributions to the 529 Plan aren’t tax deductible at the federal level. However, many states offer state income tax deductions or credits. Your money grows tax-free and withdrawals to pay tuition and other eligible expenses are free of federal taxes and, in many instances, state income taxes.

529 plans can be used to pay for various college fees like tuition, room, food, books, and technology. You can pay up to $10,000 a year for K-12 tuition. You can also transfer the money in your account to other recipients. There are more pluses than minuses in a 529 college savings plan. However, you should note that you may face tax impacts and penalties for withdrawals that aren’t considered eligible costs. Your child’s college needs financial assistance may also be reduced, and you cannot purchase individual stocks within the 529 plan. However, you can select a number of investment options. Even so, you have fewer options than if you were designing your own portfolio.

You can transfer some or all of the existing funds in your account to another investment option twice in a calendar year or after changing beneficiaries. You can also select a different investment option whenever you join the plan. You can switch to another state’s plan once every 12 months. However, there are a few states that exclude such shifts from their plans.

Each state has set a total contribution limit of $235,000 to $542,000 per beneficiary. When an account hits the limit, you will not be able to make any more donations. However, revenue will continue to accumulate. There’s no annual donation limit, but donations are considered gifts for federal tax purposes. Therefore, this year, you could donate $15,000 per donor and per recipient with no federal gift tax. You can also make a $75,000 tax-exempt 529 plan donation and evenly distribute it to your tax return for the next five years, which is an option that some grandparents use as a tool for real estate planning.

The benefits of saving for college through the 529 plan are likely to outweigh the potential impact on financial assistance. Assets in an account owned by either a student or their parents are considered parental assets for federal financial assistance purposes, and typically only 5.64% of accounts are considered annually in the FAFSA (Federal Student Assistance Free Application) calculation. This is an advantage over being counted as a student asset because distribution under this ownership structure doesn’t disqualify the university for financial assistance. The assets of the grandparents’ account don’t impact the student’s FAFSA, but the distribution counts as the student’s income and affects aid.

If you would like to learn more about 529s and other types of investment programs, please visit our previous posts.

Reference: Texas News Today (June 8, 2021) “What you need to know about the “529” Education Savings Account”

Category: 529 Plans

Avoiding Tax Issues When Gifting to Grandchildren

529 Plans allow Grandparents to help with the Cost of College

New changes to 529 Plans provide more Options

529 Plans are a Strategy for Estate Planning

A Few Ways to Transfer Home to Your Children

What is the Best Way to Leave Money to Children?

Trusts are Best for Gifting to Minors

A lot of Flexibility in 529 Education Plans

Many Benefits of 529 Plans

More Pluses than Minuses in 529 Plans

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