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Front load 529 plans for tax advantages

By Nathan Vinson
English, Lucas, Priest & Owsley, LLP

If you want to save up for your child’s future college education, 529 plans have long been a great option. Lovingly named for the section of the IRS tax code where these reside, 529 plans allow families to save for college with some tax advantages. The plans are sponsored by states, state agencies, or educational institutions, and can be either a prepaid tuition plan or an education savings plan, depending on what the sponsor offers.

Western Kentucky University campus

A prepaid tuition plan allows you to pay today’s rates for future college education. This can be a tremendous savings if you’re 100 percent certain your kid is absolutely going to a specific college (or going to college at all). These are typically state-owned colleges and universities, and you can only pre-pay tuition, not room and board. Kentucky’s prepaid tuition plan is closed, and will be reassessed annually, the plan says on its web site; Kentucky Education Savings Plan Trust does still offer a 529 plan that allows for college savings, and you can find more on that here.

An education savings plan is simply a vehicle for saving up for future college costs, and that includes room and board. These funds can also be used for private school tuition at elementary, middle and high schools, up to $10,000 per beneficiary. That $10,000 cap, though, doesn’t apply to college – just to K-12 education.

529s can avoid gift tax

These plans may have special appeal for those of wealth who want to benefit children or grandchildren without triggering the burdensome requirement to file a gift tax return. You can give each beneficiary as much as $75,000 in a 529 plan, essentially front-loading five years’ worth of gifts into one year. This doubles if your spouse matches it, so a couple can put $150,000 in a 529 plan per beneficiary. This amount will be sheltered from gift tax because of the annual gift tax exclusion (currently $15,000 per donee per year). Additionally, frontloading will allow the gift to accumulate interest and grow during that five years.

If you do contribute the maximum in a single year, you’ll be treated as giving $15,000 ($30,000 for a couple) for that year and the next four years. You do not have to pay gift tax, and those payments won’t be included in your estate, so long as you live past the fifth year after the gift.

As we all know, the costs of college education have grown exponentially. CNBC reports that even with the numbers adjusted for inflation, college costs have risen 213 percent from the 1987-88 school year to the 2017-18 school year.

A single year at the University of Kentucky is nearly $28,000, and WKU comes in at about $21,000. If your child or grandchild has their heart set on Centre College, the sticker price is $52,180 annually (although the college notes that students often receive financial aid).

Keep in mind, too, that many are choosing to go beyond a bachelor’s degree to pursue advanced education in law, medicine or business. In a competitive economy, an advanced education can be very helpful in getting noticed, so it’s understandable. Investing in a child or grandchild’s future education is worthwhile, and I’d encourage it if you have the means to do so.

Part of a larger plan

Nathan Vinson

If you are thinking of making such a gift to a family member, I’d encourage you to make this part of a larger tax strategy and to consider creating a comprehensive estate plan, if you have not done so. Our firm has extensive experience in working on tax matters for clients, and solving tax disputes, as well as trusts and estates. We would be glad to help you. You can reach me, attorney Nathan Vinson, at nvinson@elpolaw.com or (270) 781-6500.