529 Plans Are Useful for College Tuition AND Estate Planning
February 3, 2012
Filed under: Estate Planning,Tax Planning — admin @ 2:38 am
As the cost of college tuition rises, so do parents’ stress levels. According to one website, the cost of tuition for one year at some schools can be enough to make a decent down-payment on a house. By the time you’ve paid for your child to spend 4 or 5 years at a university you could almost have bought a vacation home!
This is why 529 plans are an appealing savings tool for many parents. Parents and grandparents already know most of the benefits of a 529 plan: Money inside the plan is outside of the parent’s taxable estate; additionally, funds held inside a 529 plan belong to the parent, not the child, which means not only that parents can choose to reclaim the money if needed in the future, but also that the money in a 529 plan won’t count against the student when he or she applies for financial aid.
What many parents (and grandparents) may not know, and which this article on Investors.com points out, is that 529 plans can also be a useful estate planning tool. “In 2012, the annual gift tax exclusion is $13,000. If you wish, you can put $65,000 into a 529 account for, say, your grandson now. That contribution will be treated as five annual installments of $13,000 in a row for gift tax purposes.” This can be quite a boon for parents or grandparents looking to provide some financial help to their college-age loved ones and avoid gift-taxes.
As beneficial as this sounds, it is important to always remember that no two families are alike, and what may be a useful strategy for one family can be detrimental to another. Please contact your financial planner or estate planning attorney for more information about how a 529 plan may benefit your family.
Filed under: Estate Planning,Tax Planning — admin @ 5:32 pm
American culture is one that respects independence and self-reliance; but with the current tough economic situation, and the fact that more young adults are graduating from college without jobs, or living at home until well into their 20’s, many families are opting to do things the old-fashioned way—with parents giving kids the financial help they need to buy their first home.
Helping your child make such a significant purchase, however, requires foresight and planning in order to do it without hurting your own tax- and estate-planning potential, and without creating family conflict later on. This article from CNN Money has some good advice for would-be parental mortgage-lenders.
The first thing to remember ANY time you make a monetary gift is that the federal government will only let you give away so much each year without incurring a gift tax. “In 2012, a taxpayer can give $13,000 to an individual without triggering so-called gift taxes. Married couples may underwrite their child to the tune of $26,000 a year.”
If you’d like to contribute more than $13k or $26k toward your child’s first home there are ways to go about it without hurting your own tax status later on. Your best option in this case might be to “lend money to your child — and you can offer terms far more generous than any bank’s. To make sure the money is considered a loan and not a gift for tax purposes, you’ll need to charge interest based on the IRS’s ‘applicable federal rate’ minimum for various loan maturities.” These rates are generally very good, “as low as 0.19% for loan terms of three years or less to 2.63% for loan maturities of over nine years.”
Of course, if you become your child’s mortgage lender the government isn’t going to just take your word for it; you’ll want to be sure you have the proper contracts drawn up and signed, and that you keep good records of all payments. “If the loan is properly structured as a mortgage and filed, the interest will be tax-deductible for your child. Having a contract also makes estate planning easier.”
