Answers to Common Questions about 529 Plan Contributions

 
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Why contribute to a 529 plan?
These plans allow you to help a loved one pay for their education, while minimizing estate and gift taxes.


How does the gift tax affect 529 plan contributions?
The federal gift tax allows a 529 plan contribution to be treated as a “present interest gift” — rather than a future or conditional gift. This means:

  • These contributions qualify for the annual federal gift tax exclusion.
  • You can contribute up to $15,000 to any beneficiary’s 529 account without incurring a federal gift tax.
  • If you contribute $18,000 to a 529 plan in one year, only $3,000 would be taxable.

Can I make larger, lump sum contributions?
529 plans offer an unusual feature for making large lump-sum contributions. Here’s how it works:

  • You can make a single, lump sum contribution of up to five times the annual gift tax exclusion (for a total of $75,000 in 2019).
  • You can then spread that gift evenly over five years.
  • By doing this, you’ll completely avoid federal gift tax (assuming you don’t make other gifts to the same beneficiary during those five years).
  • Married couples can gift up to $150,000 in this way.

What about gifts from grandparents?
The generation-skipping transfer tax (GSTT) is important to keep in mind. Here’s an overview:

  • This tax is on transfers made during your life, and at your death, to someone who is more than one generation below you.
  • The GSTT applies in addition to (not instead of) the federal gift and estate tax.
  • If you don’t contribute more than $15,000 to your grandchild’s 529 during the tax year, there will be no federal tax consequences.
  • As with the above lump- contribution, you can choose to treat your 529 contribution as if it were made evenly over a five-year period.

What if the owner of a 529 account dies?
When a 529 is created, a beneficiary is also designated. If the owner of the account dies, that beneficiary will inherit the value of the fund at the time of death. In some states, this would go to a “Contingent Account Owner.”


One exception to this: If the owner elected to treat a large contribution as occurring over five years, though, and then died before that five-year period ended, then the contributions to be allocated after death, would instead go into your estate.

Also, keep in mind that the account may also be considered as part of the account owners’ probate estate, or through a will. 
 

Want to learn more?
Get additional details, along with advice for the best way to handle a 529 plan given your and your family’s unique circumstances. Horizon Bank financial advisers will be happy to help. Contact us today.