529 Plans for Asset Protection and Tax Savings

Qualified State Tuition programs, also known as “529” plans, are a great way to save for the education of children, grandchildren and other loved ones. Earnings grow tax free and when withdrawals are made for qualified education expenses, like tuition, the distributions are income tax-free as well.

Normally, when an individual has control over an asset, that asset is included in his or her taxable estate for estate tax purposes.  However, there is a special exemption for 529 plans.   Under the rules governing the taxation of 529 plans, the grantor/donor may remove assets from his taxable estate by putting them in a 529 plan and yet retain complete control. In fact, the grantor/donor could even pull the money out for himself (subject to a penalty on the earnings if the funds are not used for qualified education expenses).   For high net worth individuals, 529 plans are superb estate minimization devices.

Also, 529 plans can be protected in bankruptcy under some circumstances. As long as the contribution is within the plan limits and is made at least two years before the filing in bankruptcy, the 529 plan is protected in bankruptcy.

So, a 529 plan can provide:

  • Income that is tax-free if used for education
  • Control for the donor
  • Ability to take the funds back
  • Protection in bankruptcy

Call me today if you would like more information about how you can pass wealth on to the next generation in the most tax-efficient manner.