Category: Financial Planning
Tags: Estate Planning, 529 College Savings Plans, Estate Tax

529 College Savings Plans used for Estate Tax Planning

Posted on: February 27th, 2007
An article in the February 24-25 issue of The Wall Street Journal describes how 529 College Savings plans can be used to reduce estate taxes.  Earnings on the funds invested in such plans are tax-free if used for qualified college educational expenses.  North Carolina residents also get a small tax deduction for contributions to North Carolina sponsored plans (Click "Continue Reading" for more information). 
The plans allow the owner to maintain control over how the funds are used, and even change the beneficiary to another relative or the owner himself.  If the funds are not used for educational expenses, taxes are due on the gains, along with a 10% penalty.
Gift tax rules allow using up to five years of the $12,000 annual gift tax exclusion at once, so that one person can put $60,000 into a plan in one year.  For wealthy grandparents with multiple granchildren, this can add up to substantial estate tax savings.  The current estate tax exemption is $2 million, so persons with estates over this amount may want to consider this technique.  Before establishing the accounts, however, be sure to check with a qualified tax and investment advisor.  There are fees associated with 529 Plans, and investment performance in many types of plans have been lackluster of the last several years.
Check out for a plethora of information on 529 Plans.
Effective in 2006, North Carolina allows a tax deduction for contributions to the state’s 529 savings plan. The maximum annual deduction is $750 ($1,500 for joint filers) and is allowed only for taxpayers below certain income levels: $100,000 joint, $80,000 Head of Household, $60,000 single, and $50,000 married filed separately. 
The tax deduction expires after the 2010 tax year.
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