Making College Savings a Part of Your Estate Plan

Saving for the cost of your child’s or grandchild’s college education can be intimidating. Participating in a qualified tuition program, also known as a 529 college savings plan, that is administered by the State of New York can be an effective part of your estate plan, and a great way to save for college tuition.


What is a 529 Plan?


When you (the “participant”) enroll in a 529 savings plan, you open a special account with the sponsoring state program. This account is a tax-advantaged account that helps you pay for your designated beneficiary’s qualified higher education expenses, including tuition, fees, room and board, and required books.


What are the Advantages of Saving Through a 529 Plan?


The major advantage of a 529 college savings plan is that the earnings generated from your contributions are not subject to federal income tax. In addition, New York’s 529 plan will provide you with a state income tax deduction up to $5,000 for individuals, and $10,000 for married couples.


How to Get Started with a 529 Plan


The first step you should take is to review the disclosure documents of the 529 plan you are considering. If your plan has a favorable expense ratio, and provides additional state tax benefits, you should consider enrolling to set up an account. As part of that process you should consider any investment options offered by the plan. Next, you will begin to contribute to the plan through an automatic investment plan. When the time comes for the designated beneficiary to enroll in an eligible institution, you can begin to take withdrawals to pay for eligible expenses.


What Happens if the Designated Beneficiary does not Attend College?


Funds in your 529 savings account can also be used at a qualifying two year college, vocational, or technical institution. Also, you can always name a different designated beneficiary if your original designee does not attend college. If you do not use the entire account balance for eligible expenses, you can use the funds for other higher education endeavors, transfer the balance to a different qualified beneficiary, or withdrawal the balance. Withdrawing money for non-educational purposes may be subject to tax and penalties.


How does a 529 Plan Fit in my Estate Plan?


It is important to consult your estate planning attorney or tax advisor when structuring your contributions. Generally, your 529 account is not counted as part of your taxable estate for federal estate tax purposes. Contributions to a 529 plan are subject to gift and generation-skipping transfer taxes; however, contributions qualify for the annual gift tax exclusion. You will want to consider this if you make other gifts to the designated beneficiary. You will also need to consider how your participation in a 529 plan may affect your medicaid eligibility. In New York, accounts established in your name may be counted as part of your assets for determining medicaid eligibility. Under the right circumstances, participation in a 529 college savings plan can be an effective piece of your estate and financial planning.

Contact Information