Qualified Tuition Programs (so-called “529 Plans”) and increasingly part of my estate planning conversations with clients. The key income tax benefit of a 529 Plan is that assets contributed to plan grow income tax free. So long as the assets are distributed for “qualified educational expenses,” distributions are tax free. Previously, advisors rightfully cautioned against “overfunding” these plans, since contributed assets could only be used for college tuition expenses, and any unused assets were subject to a 10% penalty. Now, however, the permitted uses of 529 Plan assets has broadened significantly, making it an even more attractive savings vehicle. Under the new tax law, the following types of distributions are considered to be “qualified educational expenses” for purposes of distributions from 529 Plans:
- College tuition (as was the case previously), books, supplies and computers or other educational equipment;
- For students who are attending college at least half-time, all “room and board” expenses;
- Up to $10,000 in annual K-12 tuition expenses; and
- Distributions to ABLE (“529A”) accounts, which are accounts established for the benefit of individuals living with a disability.
Upon establishment, a specific beneficiary of the account is named. However, should the named beneficiary not be able to use the amounts for any qualified educational expenses, the account owner can easily name another family member as the new beneficiary. The key estate tax benefit of a 529 Plan is that account assets are not subject to estate taxes at the account owner’s death.
Many of my clients, especially those in the “Baby Boomer” generation, have discussed various ways of benefitting future generations for a specific purpose. Many of these clients like the idea of “skipping” their adult children with at least some portion of their assets to meet the educational expenses of grandchildren. In addition to establishing 529 Plans for grandchildren during lifetime, many of these clients are also directing, under their Will or Revocable Trust, that additional amounts be allocated to new or existing 529 Plan accounts following their deaths. Given the greater flexibility afforded to these plans under the new law, I anticipate that the use of 529 Plans within an estate plan will only increase in the coming years.