Bay Area Estate And Tax Planning Law Firm

Using 529 accounts as estate planning tools

On Behalf of | Mar 3, 2024 | Estate Planning |

California residents may be able to avoid estate taxes by making gifts to an irrevocable trust during their lifetimes. However, by doing so, they lose control over the money, which may be problematic if they need it later in life. Fortunately, it may be possible to avoid this issue by putting funds into a 529 education savings plan.

Funds in a 529 stay outside the estate

Under the Internal Revenue Code, funds in a 529 plan are not included for purposes of calculating the value of a grantor’s estate. At the same time, the grantor retains ownership of the plan and has the power to change who the beneficiary is. This is ideal in the event that your original beneficiary dies or no longer needs the money in the future. In addition to a child, you can make a grandchild, niece or other family members as the account beneficiary.

Contributions can be frontloaded

In 2023, the gift tax exclusion was $17,000 per recipient. However, with a 529 plan, you can make gifts equivalent to five times that amount in a single transfer. The exclusion limit doubles for married couples, which means that you could reduce your estate’s value by up to $170,000 with one contribution. Ultimately, this can help achieve some or all of your estate planning goals in a relatively easy manner. It’s possible that a portion of any amount frontloaded could be credited back to your estate if you pass within five years.

Trusts, 529 plans and other tools may be available to help meet your estate planning needs. Ideally, you’ll review your plan each year or after a major life event to ensure that it still accomplishes key goals or so that you can make changes in a proactive manner.