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Contributions To A Section 529 Account Can Benefit An Estate Plan

Most people place helping heirs and beneficiaries obtain a higher education high on their list of priorities when creating an estate plan. Providing the means for an education can improve the lives of children and grandchildren in far more ways than simply writing a check can. Fortunately, helping an heir go to college can also lead to certain tax breaks and help reduce an estate’s tax burden.

A Section 529 college savings plan can be extremely beneficial part of an estate plan. The IRS views contributions to a 529 account as gifts, eligible for the yearly and lifetime gift exclusions. Currently, the annual gift tax exclusion is $14,000. However, the IRS also allows lump-sum contributions of up to $70,000 to be spread out for tax purposes over five years. So long as no other gifts are made during that time, the contributions do not earn federal tax penalty.

Section 529 college savings accounts are also popular because they can accumulate income without earning federal income tax. Ohio plans are also free of state tax. Section 529 plans are named after Section 529 of the Internal Revenue Code, which was created as a tax incentive in 1996 as a way to help families pay for college.

An example may help to illustrate the benefits. If an Ohio grandparent has a $6 million estate and wishes to reduce his or her estate tax burden. If that grandparent has eight grandchildren, in one year the grandparent can contribute $560,000 to help each child pay for college, without incurring any federal taxes. Meanwhile, that $560,000 can earn income on its investments, which will also be tax free.

A Section 529 plan can also provide flexibility. If one beneficiary of the 529 plan chooses not to attend college, then the money can transfer to another beneficiary, so long as the beneficiary is in the same family and not in a younger generation. If unexpected expenses arise, a contributor can also recover the money, although there is a 10 percent penalty on withdrawn earnings.

A 529 plan one consideration among many

Helping family with college costs are often an important part of an estate plan, but are by no means the only consideration. Individuals and married couples seeking to reduce or eliminate estate taxes have several options. However, reducing an estate tax burden must be done carefully to avoid unintended penalties and to keep financial freedom.

Ohio residents with questions on whether a 529 plan can be used to reduce their estate should contact the experienced estate planning attorneys at Russo, Rosalina & Co., LPA.