Transferring your legacy
Estate planning primer: Qualified tuition plans
Part of estate planning includes helping with the ever-escalating costs of education for children and grandchildren. This can be done by writing a check directly to the educational institution for the tuition when the tuition is due, but for younger children or grandchildren you may wish to defer the receipt of funds until the child or grandchild needs to pay for college tuition costs. You can make a gift into a custody account or into a trust that qualifies as a current gift under the Uniform Gifts to Minor’s Act, or you can fund a Qualified Tuition Plan under IRC Section 529.
There are two types of 529 programs: prepaid plans, and savings plans. The advantage of a 529 plan over a Unified Gift to Minors Act plan is that the earnings on the assets in the 529 plan aren’t taxed until the funds are distributed and distributions are tax-free up to the amount of the student’s “qualified higher education expenses.”
Prepaid Programs: Some colleges allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary (child) won’t be starting college for some time. This effectively locks in today’s rates for tomorrow’s enrollment. For example, if a child is accepted to college starting 2020, you could buy four years worth of tuition credit from their college in 2019 at 2019 rates. This can be a big savings when tuition costs are rising rapidly, but not if the tuition amounts are level or declining.
Savings Programs: Like a Traditional IRA or a Roth IRA, tuition amounts covered by a savings plan are dependent on the investment performance of the money you give to the plan. If it grows, more cost can be covered, but if it declines, less will be covered, so it pays to be conservative if the need for distributions is rapidly approaching.
Qualified higher education expenses: Tuition (including up to $10,000 in tuition for an elementary or secondary public, private, or religious school), fees, books, supplies, and required equipment, together with reasonable room and board is also a qualified expense if the student is enrolled at least half-time, are considered qualified higher educational expenses. Distributions in excess of qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax is also imposed.
Beneficiary: The beneficiary of the program is specified when you start the funding. You can, however, change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without income tax consequences.
Eligible schools: Any college, university, vocational school, or other post-secondary school eligible to participate in a student aid program of the Department of Education are eligible schools for these programs. This includes nearly all accredited public, nonprofit, and proprietary (for-profit) post-secondary institutions.
The contributions you make to the qualified tuition program are treated as gifts to the student. These contributions qualify for the annual gift tax exclusion amount ($15,000 per person per year for 2019) adjusted annually for inflation. If your contributions in a year exceed the exclusion amount, you can elect to take the contributions into account over a five-year period starting with the year of the contributions. For example, you could contribute up to $75,000 ($15,000 x 5) per beneficiary in 2019 without gift tax. If you and your spouse both contribute, you could give up to $150,000 for 2019 per beneficiary, subject to any contribution limits imposed by the plan.
In setting up the 529 programs, keep in mind that you may not be able to make the distributions from the program when a very young (or unborn) beneficiary goes to college, so designate an alternative custodian, such as a parent of a grandchild, to make distributions for you.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.