Some people probably consider estate planning to be a concern only for the very rich. After all, estate taxes don’t apply unless the value of a person’s assets is well over $10 million.[i] For a married couple, the amount is twice that. So, most Americans don’t pay estate taxes. But that doesn’t mean they shouldn’t do some estate planning.[ii] A well-considered gifting strategy could benefit some investors. And a 529 education savings plan account may be an important part of that.
What Defines a Taxable Estate?
Congress makes federal tax policy, which defines the value of a taxable estate. And the definition is a moving target. Current tax law lowers the value of a taxable estate to just under $5.5 million in 2025.
Adding together the components of an estate – a home, vacation or investment property, cars, boats, other toys, savings, investments and retirement accounts – shows that it may be possible that more Americans could be subject to the estate tax than they think.
And this is why a little estate planning might be a good idea – even for investors who don’t consider themselves rich.
What Could Delay Transferring an Estate?
Regardless of its value, an estate may still be subject to probate. Probate is a court-supervised process to administer the transfer of someone’s assets. Probate can delay the transfer of an estate to heirs. Sometimes the process can take months to settle.
Fortunately, probate may be avoided with some basic estate planning.
How a 529 Plan Account can be Used in an Estate Plan
A 529 education savings plan account is a tax-advantaged vehicle to save money for kindergarten to graduate school tuition. Earnings in a 529 plan account are not subject to federal income tax. And withdrawals to pay qualified education expenses are also exempt from federal income tax.
The accounts also come with a number of estate planning benefits.
- Establishing a 529 plan account removes contributed assets from a donor’s estate. But the account owner may still have control over those assets, including the ability to change beneficiaries.
- Amounts in 529 plan accounts may also be excluded from an account owner’s assets in the states that impose an estate tax. Some beneficiaries (depending on their relationship to the donor), may also exclude 529 plan accounts from state inheritance taxes.
- Naming a successor or contingent account owner may help 529 plan accounts avoid the probate process in the absence of a detailed estate plan, trust, or last will and testament.
- Contributions to 529 plan accounts enjoy special gift tax treatment. Amounts above the annual gift tax exclusion can be averaged over five years to avoid gift taxes on the initial investment.
Versatility of 529 Plan Accounts
Many investors see the value of using a 529 plan account to help loved ones pay education expenses. But they may miss the estate planning opportunities the accounts also provide. As with many financial planning issues, such ancillary benefits may not be obvious on the surface.
That’s why investors should consult with qualified legal, tax and investment experts before making any long-term planning moves.
Contact us for more information about 529 plan accounts.
[i] For tax year 2022, a federal estate tax return must be filed when combined gross assets and prior taxable gifts exceed $12,060,000. That amount will increase through 2025, when it is scheduled to drop to approximately $5 million (before being adjusted for inflation). Source: U.S. U.S. Department of the Treasury, Internal Revenue Service website (www.irs.gov/businesses/small-businesses-self-employed/estate-tax). NOTE: Several states have their own estate or inheritance tax laws.
[ii] The information in this article is provided for educational purposes only and does not constitute investment, legal or tax advice. Investors should obtain relevant and specific professional advice before making any investment, legal, tax, or other decision.
