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Estate tax and college savings accounts

On Behalf of | Oct 15, 2014 | Inheritance And Estate Tax |

Many New Jersey readers are aware of the tax benefits of establishing and funding a Section 529 college savings account. The money deposited within is allowed to accumulate interest tax-free, and there is no penalty for withdrawing funds to cover the cost of tuition and other college needs for the account’s beneficiary. However, there are also estate tax-planning benefits associated with a 529 account, which is a fact often overlooked by many.

Money deposited into a 529 account can reduce one’s taxable estate. Such contributions are considered completed gifts, which means that these funds are also allowable as part of one’s annual gift tax exclusion. For those who are able to make a lump-sum contribution, the gift tax exclusion can be spread over the course of five years, leading to significant savings.

Individuals can contribute up to $70,000 to a 529 account for each individual they wish to assist in paying for college. Married couples can contribute $140,000 for each college-bound child. There is no limit on the number of children that can be provided for, and the total of all contributions that adhere to the above individual limits are excluded from one’s taxable estate.

This is an area of estate planning that may be of interest to many New Jersey residents, especially those who are looking for ways to both provide for the education of loved ones and maximize their use of the $5.34 million federal estate tax exemption. Setting up a 529 college savings account is simple, and it should be considered when creating other estate-planning strategies. At the end of the day, allowing wealth to pass on to loved ones is the central point of any estate plan, and these accounts provide a means of doing so without incurring a higher estate tax.

Source: Market Watch, “Using 529 college savings accounts for estate planning“, Bill Bischoff, Oct. 7, 2014