Should a 529 Savings Plan be part of your estate planning?

On behalf of Bebout, Potere, Cox & Bennion, P.C. posted in estate planning on Sunday, March 26, 2017.

A common theme in estate planning is providing for the educational costs of beneficiaries. Today’s post takes a look at an increasingly popular option, tax-advantaged 529 savings plans. This type of plan may help cover school expenses when a child reaches college age.

In one aspect, a 529 plan is similar to a revocable trust, as the individual

retains full control over the account. The owner may even request all of the funds back. Unlike a revocable trust, however, the funds in a 529 plan are removed from the individual’s taxable estate. Thus, in situations where an individual is seeking to remain under either a state or federal estate tax threshold, a 529 can be a smart choice. Contribution limits are set by state rules, but may range up to $500,000 per beneficiary.

A 529 plan also offers flexibility. The funds do not have to be withdrawn by a certain age or within a certain amount of time. The money invested grows tax-deferred, and the beneficiary will not have to pay state or federal taxes for withdrawals. There are restrictions on the use of the funds, of course, which generally must be for qualified, college-related education expenses.

The money invested in a 529 plan is typically invested in large mutual funds and managed by well-known financial companies. The mix of mutual funds can be riskier according to the age of the beneficiary. Initial investments might favor stocks, with the allocation gradually shifting toward cash and bonds as the beneficiary reaches college age.

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