529 Plans and Estate Planning

In the year 2013, the annual gift tax exclusion amount increased to $14,000 per recipient of the gift.  There is no limit on the number of recipients you may choose to give a gift to. If you are married each spouse can give up to their annual gift tax exclusion amount.  This is called gift splitting, which allows a married couple to give to any one recipient up to $28,000 per year without suffering any gift tax issues.  As long as the gift qualifies as a present interest gift the annual exclusion will apply.  In order to qualify as a present interest gift the recipient of the gift must have immediate ownership in the gift.

There is a way to gift to children and grandchildren without worrying about the annual exclusion limit.  If you have children or grandchildren in college, the government provides an exclusion from the gift tax for gifts made to pay tuition to a college, university, private high school, private grade school, and even some private nursery schools.  It is permitted for both full-time and part-time students. In order to qualify for exclusion from the gift tax, the money must be paid directly to the educational institution.  Room and board, books and supplies do not qualify as part of tuition. The last requirement is that the IRS must recognize the educational organization as qualifying.  Most universities and elementary schools will qualify but you need to be careful with daycare or nursery.

Another way to pay for tuition for your children and grandchildren is through the use of a 529 plan.  A 529 plan allows you to make gifts to the plan to help pay for your child or grandchild’s tuition in the future. Although contributions are subject to the $14,000 annual exclusion, you can prefund the plan with a $70,000 contribution in one year, if you make no further gifts to that recipient in the next four years. The $70,000 gift is spread out over the next five years, but the entire $70,000 can start earning interest immediately.  The earnings in the 529 plan grow free from tax and the distributions from the 529 plan are not included in income as long as they are for qualified higher education expenses.

With the new higher gift tax exclusion amount there are now greater opportunities to transfer wealth to the next generation.  If you want to ensure that a legacy is left behind, there are now more opportunities to do so with the use of the annual gift tax exclusion in combination with 529 plans and tuition gifts.

For more information or to schedule your free estate planning consultation, contact us today at 888.222.1328.

Contributed by MH Prescott, Arrowhead and Flagstaff Estate Planning Attorney and Partner David T. Eastman

About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.