Today, financial planning and estate planning are inherently intertwined in a number of different ways. Comprehensive estate planning requires responsible financial planning, and responsible financial planning will create assets which comprehensive estate planning will help you protect. One of the world’s most important assets is our children. Once children enter the picture, their future becomes one of the most important focuses of a parent. To that end, one of the most important aspects of a child’s well-being is their education and a college savings plan – typically known as a 529 plan – can be an integral part of financing higher education opportunities, which makes it an important part of your estate planning considerations, too.
Understanding 529 College Savings Plans
A 529 college savings plan is a state-sponsored program that enables parents or other interested individuals to set aside money each year to eventually help offset the rising costs of higher education. These plans are meant for long-term contributions that build the amount by collecting earnings on the principal you contribute to the plan. Eventually, you can make penalty-free withdrawals from the plan as long as you are using those withdrawals to pay for qualified educational expenses. These withdrawals may even be made directly to a school for such expenses. Some states offer various types of plans, but most of them accomplish the same goal.
While 529 college savings plans do not allow for federal income tax credits based on the contributions, many states – including New York – do allow for a tax credit for your contributions to these plans, at least up to a certain amount. There is no federal limit on the amount you can contribute to one of these plans, though New York currently caps the amount that can be contributed to a given individual across all plans in their name at $375,000. The reason for this cap is because these plans are usually structured in a way that help you avoid the gift and generation-skipping transfer taxes that might otherwise be associated with distributing assets so long as the amount you are contributing does not exceed the yearly exemption.
529 College Savings Plan and Your Estate Plan
As these plans enable you to avoid certain taxes, one of the biggest benefits of a 529 college savings plan in relation to your estate plan is that contributions within the yearly exemption are considered completed gifts during that time period. These accounts remain the assets of the creator, and as such all contributions and earnings on those contributions can be deducted from the overall value of your estate if you were to die with this type of plan in place. That means that you can help reduce the value of your estate without making an outright gift of a large sum of money that may otherwise be subject to heavy taxes. Deciding whether a 529 college savings plan is right for you depends a lot on your individual circumstances, and an experienced estate planning attorney can help you understand all of the options at your disposal that might be useful in accomplishing your estate planning goals.