San Diego Estate Planning Lawyer Blog
Sa Diego, California has many different schools both public and private. The ever increasing tuition and fees in schools in San Diego, California has made the planning of the costs part of estate planning as many persons use their assets in their estate plan to pay for school for their children.
In San Diego, California, many financial institutions offer these types of 529 plans. Some financial institutions in San Diego which may provide these include the Bank of America, Wells Fargo, Washington Mutual and others.
The ever-rising cost of a college education has led to the creation of college savings plans that have been given various federal tax advantages. Among these are “529 plans,” named after the section of the Internal Revenue Code that sets forth requirements for favorable tax treatment of qualified state tuition programs. 529 plans vary from state to state with regard to investment options, contribution maximums, and state income tax treatment. One type of 529 plan allows taxpayers to purchase tuition credits for a designated beneficiary, thereby locking in today’s college costs. A second type allows the donor to contribute to an investment account to pay for a beneficiary’s higher education expenses, such as tuition and room and board.
Individuals can contribute up to $50,000 to a 529 plan in one year on behalf of a beneficiary ($100,000 for married couples) without being subject to gift tax. In effect, the $50,000 contribution is treated as five separate $10,000 annual exclusion gifts. Gift tax is avoided so long as no other gifts are made to the beneficiary in the same five-year period.
Anyone can contribute to a 529 plan on behalf of the beneficiary. Grandparents, other relatives, or friends of the family can use 529 plans as an effective estate planning tool. The plans are unusual in that donors still can retain control over the account, and even take it back if necessary, while reducing the size of their estates. Under current law, earnings in a 529 plan are tax deferred, but the 2001 tax law provides that, beginning January 1, 2002, earnings taken out to pay college expenses will be tax free.
Other important changes in 529 plans were made by the 2001 federal tax legislation. Whereas plans previously had to be sponsored by a state or state agency, one or more educational institutions, including private schools, can set up prepaid tuition programs. Under the new law, money from one 529 plan can be rolled over into another such plan up to three times for the same beneficiary without having the transaction considered to be a distribution. A penalty of at least 10% of earnings formerly was imposed if the donor took back the money or the money was used for anything other than qualified expenses, but now there is a flat 10% penalty. Lastly, the new law allows a taxpayer to claim a federal tax credit for paying for a child to go to school while excluding from gross income funds distributed from a 529 plan for the same student, as long as they are used for different expenses.
Please contact our law firm of Law Office of Scott C. Soady, A Professional Corporation if you would like a complimentary consultation on estate planning. Please also feel free to e mail us.