New York Estate Planning & Elder Law Blog
529 ACCOUNTS
Estate planning is the legal strategy by which one generation transfers wealth to the next, which involves an the use of various trusts and/or a will or even transferring money or items to corporations in an effort to legally and ethically reduce tax liability. One of the easiest ways to insure that your children, grandchildren or loved ones who have not yet graduated from high school have a much easier ride in life is to have them graduate from college.
College graduates almost uniformly enjoy a longer life, better health, live in safer neighborhoods and make more money than those who did not graduate from college. There is a hitch, however, in that college is an extremely expensive undertaking. College graduates can be saddled with debt that can follow them for decades. As such, if you can find a way for them to go to college and graduate with no debt or at least minimal debt, you will ensure that you transferred more wealth to them than even the average wealthy parent can leave via traditional estate planning. Many people are aware of 529 plans, which allows for deposits into an account, wherein the money grows tax free and is non-taxable when withdrawn if used for educational costs.
GIFT TAX LOOPHOLE UNIQUE TO 529 ACCOUNTS
Some would say that there is a problem in funding the 529 in that there is not enough time to plan for college costs and fund the account to pay for college. After all, under gift tax law, anything over $14,000 per year is a taxable event. Congress recognized this and created a loophole found at 529(c)(2)(B) of the Internal Revenue Code, which allows a party to gift five years worth of gift tax exclusions in less than five years. It is called superfunding the 529 account. Since the gift tax exclusion is personal and not shared between a married couple that means that they can contribute up to $140,000 at the time of the creation of the account. Better still, anyone can contribute or create a 529 account; grandparents, godparents, doting aunts and uncles included. Since 529 accounts rely on compound interest, front loading a 529 account, if that is financially feasible, is best since it better to get a percentage return on a larger sum, even if no new money goes in for a time, versus having the same amount paid into the account over five years.
Once the individual pays the full five years worth of gift tax exclusions they cannot pay back into the account. The accounting is relatively straightforward, the aggregate amount over five years cannot be more than $70,000. So, if you gift $60,000 on day one at the time of creating the account and nothing again until year four, at which time you deposit an additional $10,000, you can pay up to $60,000 into the 529 once again in the next calendar year after the five year window ends. Of course it is worth noting that anyone can pay more than $70,000 into account if they want, they will, however, create a taxable event for which there will be gift tax liability.