529 Plan’s Future when College is not in the Future

What would happen to your daughter’s 529 plans future when college is not in the future? This is an excellent question to consider. As you look at your three-year-old daughter, all you can see is how smart, beautiful and intelligent she is.

Of course she’s going to a very good and probably very expensive college! At least, this is what you and your spouse determined even before she was born when you opened up her 529 plan. But what if (gasp) college just isn’t right for her? After all, it’s not the right place for everyone.

Well, you do have a few options. You can do nothing. You can hope and pray that she changes her mind and decides to go to college at another point in her life. Or in reality, beg and plead and badger her into going to college. If you make this choice and your stubborn little angel still has not used the 529 monies, she can be the contingent owner of the account.

Then, when you die, she will become the owner and can change the beneficiary from herself to one of her children. This 529 plan then becomes a gift from you to your grandchildren without passing through our estate.

More realistically, you would change the beneficiary from your daughter to her younger brother. Being a sibling, he would have an approved relationship to the previous beneficiary (our daughter).

Approved relationships to beneficiaries are as follows: son, daughter, grandchild, stepchild, father, mother, stepparent, brother, sister, stepbrother, stepsister, nephew, niece, uncle, aunt and the spouse of any of the before mentioned individuals. Two other options for transfers would be your daughter’s spouse or a first cousin. Needless to say, there are a lot of choices of people to transfer this 529 plan to.

You could also take the money out of her account and use it for yourselves. Vacation money, perhaps? But there will be a 10% penalty on the earnings portion of this nonqualified distribution. The penalty is not assessed on principal. The earnings on this 529 plan will be taxable at the usual income rates. The good news is that the money that you originally invested can be withdrawn without tax or penalty.

Now just a brief glimpse of the unthinkable, what would be the future of my daughter’s plan if she were to die? The rules for this are a little murky. It appears that the funds would have the 10% penalty waived if you would have the funds distributed to your daughter’s estate.

Or, once again you could change the beneficiary to your son, which would not incur a tax result. These rules would also apply if your daughter would become disabled or if you would withdraw the funds because the funds are not needed for college because our daughter has received a scholarship.

If college doesn’t become the plan for you daughter, the best option for you would be to change the beneficiary to your son. You place a great deal of importance of a college education and believe that 529 plans are the best place for you to invest for our children’s future.

For any family, the benefits of investing in a 529 plan far outweigh the risks involved. It’s just nice to know that if your children decide not to pursue a college degree that you have options to consider. This is a summary of the 529 plan’s future when college is not in the future. It’s just hard to predict what will happen in your crazy so-called life.

The 529 College Savings Plan as an Estate Planning Move

Let’s take a brief look at the 529-college savings plan as an estate-planning move. A 529 plan is not merely just a great vehicle to fund your child or grandchild’s future. A 529 plan is an excellent tool to remove money from your taxable estate. This will assist you in lowering your tax liability and keeping intact more of your estate for your loved ones once you pass.

All 50 states and the District of Columbia now offer some type of 529 savings plans. A 529 plan is a state sponsored savings plan that invests money on behalf of beneficiaries. The earnings are tax deferred from federal income tax and most states have programs that will defer state taxes. If your beneficiary uses the money from this fund for any qualified education purpose, the withdrawals will be free of tax.

There is a lot of competition between states that has lead to very large contribution limits. This is good news for you as you plan your estate. 529’s have extremely simple investment options- age based and individual portfolios. Basically, these college savings plans afford the family the ability to transfer wealth from generation to generation, free of income, estate and gift taxation.

So what makes a 529 college savings plan so attractive to an estate planner? They do not have any income limits unlike the educational IRAs. Almost everyone can qualify for a 529. And if you’re looking for a way to reduce your estate tax bill, this is a great solution.

Take advantage of $11,000 in annual tax-free gift contributions. If you’re married that means you can contribute up to $22,000 for each beneficiary in one year. This is free from federal gift tax penalties. It is advisable to look into your state laws on gift planning for 529’s as they vary.

If you need to reduce the size of your estate you could contribute up to $60,000 (five years worth of gifts) in year one of a five-year period. Or if you’re married you can contribute up to $120,000. This is a good resource to transfer wealth by reducing the size of your estate and do away with estate taxes.

The account owner is always in charge of the plan’s assets. Even though the monies added are considered gifts, the owner does keep control. The donors can even take back the money for themselves or transfer the account to another beneficiary. If the owner of a 529 account were to die, the value of the account would not be counted in the estate.

The account value would be in the beneficiary’s estate. The exception to this would be if you had made the 5-year election and passed before the 5 years was over. Then, the part of the contribution that was assigned to the years after your death would be included in your federal gross estate.

It is also very easy to move the money in an account through 529 rollovers or by changing your beneficiary. If you have a need to distribute your estate, you can set up 529 plans for a large array of family members. This includes children, siblings, grandchildren, uncles, aunts, stepfamily, cousins and so forth.

If you need to transfer wealth, look into 529 plans as part of your estate planning strategy. At the very least, the 529 college savings plan, as an estate-planning move is something to discuss in more depth with your tax professional. This is an extremely generous gift for your beneficiary. Imagine the reward of knowing you've provided someone with the gift of an education.

The Ins and Outs of Controlling a Coverdell ESA

Be sure of exactly who controls a Coverdell ESA; know all of the ins and outs. No one wants to deal with the headache of an 18 year old discovering their education fund only to run rampant making unqualified purchases. Of course, this would not be the behavior of every college student, but it will happen to someone out there somewhere. Here are some control ins and outs for your consideration.

With a 529 plan, you can keep in complete control of the account as the account owner and can even have the value of the account refunded for your use. This is a little different with a Coverdell ESA. The responsible person (parent or guardian) must administer the account for the benefit of the child.

Any money that you take out of the ESA must be for the benefit of the child. It should not be refunded to the person who established the account. Coverdell accounts are essentially an irrevocable gift.

Since the beneficiary of the Coverdell is not of age when you start contributing to the account, when the account is started an adult is named the responsible individual. This individual is typically the parent or guardian of the child. There will be policies at the financial institution you select to handle your ESA that determine the supervisory authority for the account.

The responsible individual may be able to retain that authority for the life of the account. If they wish this individual may be permitted to transfer the authority to the child at age 18.

With a Coverdell ESA, the responsible individual has more control to prevent the child from using funds for non-qualified purposes than UTMA or UGMA accounts. (Uniform Transfers to Minors Act and Uniform Gifts to Minors Act) If the account is not completely empty by the time the beneficiary reaches age 30, the balance will be paid to the beneficiary in 30 days.

In case of the death of the beneficiary, the account will be paid to their estate. This is unless there is an authorization from a legal representative to change the beneficiary to a surviving family member or spouse who is under the age of 30.

As the responsible party you have the control to change the beneficiary to another family member at any time as long as there was an agreement when the account was started. Then, you can change the beneficiary to another family member under 30 without having income tax and penalty. This includes anyone in your immediate family, including stepchildren or stepsiblings and cousins.

If you are the grandparent who has established this account you will not be able to change the beneficiary or have the account refunded for your use. Your choices are to name the parent, guardian or child as the responsible individual, you will more than likely not be able to name yourself.

You should look to restrict the powers of the responsible individual if you do not want the parent or guardian to be able to change the beneficiary. It is understandable if you want the account to stay in the name of your named beneficiary no matter what the circumstance. In this instance, you do not have the same control of the ESA that a 529 plan would grant you. This may affect your decision on which account you select.

If you have more questions on your Coverdell ESA, talk with the providers of the account. This is a great way for parents, grandparents and children to work together to pay for future education expenses. The ins and outs of controlling a Coverdell ESA are important. It’s good to know exactly who’s in control of your money.

What’s Up with 529 College Plans in Texas?

States' 529 college savings incentives plans have become the newest way for families to save money for their children's future higher learning educational expenses. In Texas, there are two popular sections 529 college savings incentive plans that can help you save for the education your children deserve.

What Are the Two 529 Savings Incentive Plans in Texas?

The 529 savings incentive plans in Texas are known as Texas Tomorrow Funds. Separately, there are two funds: the Texas Tomorrow's College Investment Plan and the Texas Guaranteed Tuition Plan. Here is a brief overview of each plan so you can decide which one would work best for your family. But remember, you can also choose to invest in both plans if you so wish.

The Texas Tomorrow's College Investment Plan

This plan is managed by the Enterprise Capital Management group. The basic purpose of this 529 savings incentive plan is to provide a safe and secure tax-benefited investment vehicle for families who want to save for college. The Texas Tomorrow College Investment plan offers great flexibility, with a choice of over 20 different investment portfolios to choose from.

The Texas Tomorrow's College Investment plan allows your money to grow in a tax-free environment. It also allows for tax-free withdrawals when you are withdrawing earnings to be used for qualified education expenses.

What Expenses Are Covered by the Texas Tomorrow College Investment Plan?

The Texas Tomorrow's College Investment Plan covers all the basic higher education-related expenses, including tuition and mandatory fees, expenses related to room and board, textbooks and supplies, and some transportation costs. The Texas Tomorrow College Investment plan is very accessible, with easy year-round enrollment available. There are no age limits on this plan.

What Tax Benefits are Associated with the Texas Tomorrow College Investment Plan?

There are many tax benefits associated with this plan, including many federal tax benefits. Federal tax benefits for this plan include tax-free earnings, access to HOPE and Lifetime Learning tax benefits, as well as access to other favorable federal tax estate and some gift benefits.

Your Other Texas 529 Option The Texas Guaranteed Tuition Plan

The other section 529 plan available in the state of Texas is the Guaranteed Tuition Plan. The Guaranteed Tuition Plan helps families lock in the cost of a higher education today. It is a basically a prepaid plan where you can pay for your children's future college expenses at today's cost.

The plan allows you to use the benefits at any accredited institution of higher learning in the United States. The benefits of the Guaranteed Tuition Plan are protected under constitutional guarantee by the State of Texas. In most cases, earned distributions on the Guaranteed Tuition Plan are tax-free when they are used for most kinds of educational expenses.

What Expenses Does the Guaranteed Tuition Plan Cover? What about Tax Benefits?

The Guaranteed Tuition Plan covers only the basic expenses, which includes tuition and any mandatory fees. As for tax benefits, the Guaranteed Tuition Plan offers the same federal tax benefits as the Texas Tomorrow's College Investment Plan, which include tax-free earnings, access to the HOPE credit and Lifetime Learning credit, and other favorable federal tax credits.

What Are the Restrictions of the Guaranteed Tuition Plan?

There are certain restrictions on the Guaranteed Tuition Plan. For instance, the Guaranteed Tuition Plan has an age limit, available only for those newborn to 12th grade. Another restriction on the Guaranteed Tuition Plan is that it is not available for year-round investment.

Check the State of Texas web site for dates on when to enroll in the Guaranteed Tuition Plan. Also, to open a Guaranteed Tuition Plan account, you must be a citizen of the State of Texas.

What the $12k Gift Tax Exclusion is All about in Terms of 529 Plans

When you get ready to save for college, whether you are saving for your own child or for a grandchild, there are many possibilities for you to consider. Will need shear it gets more and more expensive to fund a college education. Because of this many people are looking into starting college education funds from the time of their child or grandchild is very young.

One of the more popular ways to save for college is the 529 plan that allows you to put money back for college now and lock in today's savings. Another reason why the 529 plan is so popular is because of the $12k tax exclusion. This tax exclusion allows anybody to give to a 529 plan tax-free, as long as it does not exceed $12,000. Here is a closer look at the 529 college savings and this gift tax exclusion.

There are many reasons why the 529 plans are so popular today. These types of plans encourage people to save now for their child's future college expenses. This plan is also known as the qualified tuition plan and is sponsored by state colleges and universities and are fully endorsed in authorized by the Internal Revenue Service.

There are essentially two different types of 529 college savings plans. One is the prepaid tuition plan, and one is the college savings plan. All 50 states support these plans, and all public colleges and universities are required to take the 529 college savings plan. There are even a small group of private colleges and universities that will accept this plan as well.

The prepaid 529 plan is quite popular because it is accepted in all states at public universities and colleges in locks in college tuition fees at today's costs. The money saved using the 529 plan covers all costs associated with attending college, including room board books and other necessities.

Many family members like to contrary to the 529 college savings plans for a variety of reasons. One of these reasons is because they can give this money to the recipient and save on taxes. You have got to $12,000 as the gift tax exclusion is applied to your gift. All contributions to a 529 college savings plan are completely exempt from the estate taxes and gift taxes.

If the certain specifications and criteria are met. For example, a parent who owns an account for their child can make a lump sum contribution of up to $60,000 for each of their children when they did this.

They can avoid incurring a taxable gift on this amount. This is a great way to save money for college without being double tax in the end. Nobody wants to have their child go to the frustration of having to pay taxes on a lump sum of money that they have intended to use as college.

In addition is also important to remember that the 529 college savings plan is also popular because it is safe from bankruptcy, should it occur. Almost everyone can open a 529 plan based on their financial situation, because most of these plans offer a wide variety of saving options.

The best way to get detailed information about the 529 savings plan is to consult your account or financial advisor or find information on the Internet before deciding to use a 529 plan were before you decide to use the $12,000 gift tax exclusion you should understand how these plans were and how it will affect your income.

When you have children, and you want them to attend college, why wait until it's too late to save for college? Learn more about the 529 college savings plan today and start saving now.

Switching from your UTMA/UGMA to a 529 Plan

Should you consider switching from your UTMA/UGMA to a 529 plan? This is technically possible but be aware, there are some pitfalls. Before looking at this question, it may be useful to be refreshed on the account basics.

The Uniform Transfers to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA) is a type of custodial account for children. These uniform acts have been adopted by most states as a way to transfer ownership of property to your children. Both UTMA and UGMA provide for similar account features.

In a nutshell, these Acts allow you to fund an account for “little Suzie”, but will limit the access of the account to her until she is of age, typically 18-21 years depending upon where you live. She is the actual owner of the account, but you are the custodian. You will control the account until Suzie is no longer a minor. Then the custodial relationship ends and she will take control.

All gifts put into a UTMA/UGMA account are permanent gifts to your child who is the beneficiary of the account. Once money is placed in the account, you can make fund withdrawals only for items that benefit your child.

Some examples of these items could be private school fees, a computer, books, piano lessons, a learning camp, school transportation and other items as such. Legally this is the child’s money. Thus, if custodial money is transferred to a 529 plan, that ownership is supposed to be maintained.

Since the money in your UTMA/UGMA fund needs to be used for the benefit of your child, it means it is possible make an investment into a 529 plan. The 529 plans must be established for the same child.

You can’t take the money from “little Suzie’s” plan and put it into a new plan for “Little Bill”. Different plans handle the switching from your UTMA/UGMA to a 529 plan in a couple of different ways. Either the minor child becomes the owner as well as the beneficiary or you remain the owner, but there may be restrictions on future changes to the beneficiary.

In accordance with federal law, only cash can be contributed to a 529 savings plan. This means that all of your current investments in the UTMA/UGMA account need to be converted to cash if the have been placed in real estate, stocks and such. Keep in mind that making these transfers will usually be a taxable event.

Perhaps a better idea would be to “spend down” the custodial account on items that you would have purchased for your child anyway. Items purchased need to be for the benefit of the child. Also items cannot be a normal parental expense such as food and shelter.

It’s been said that you can revisit your spending history and reimburse yourself for things like private school fees, summer camp, music lessons and such. Then you would take the money you’re reimbursed and make an equal contribution into the 529 plan.

If you do decide to go ahead and make a direct transfer into a 529, it may be a good idea to keep the new funds in a separate account and not mix them with other 529 funds. You are still bound by the rules of the UTMA/UGMA accounts.

This means that you cannot change the beneficiary and you must turn over control of the 529 plans when your child comes of age. All future gifts to the switched plan will be treated like UGMA/UTMA contributions and they are considered permanent gifts to the child. Consider these ideas when switching your UTMA/UGMA to a 529 plan.