A Powerful Tool for Wealthy Families: Maximizing 529 Plans
A pair of doting grandparents could establish a 529 for a new baby in the amount of US$180,000. Combining the two approaches offers an effective tool for wealthy households to help younger generations. If for some reason you fund a 529 plan but need to take the money back, the amount that has compounded from the original funds is taxable, and you’ll owe a 10% penalty. For example, expenses that qualify to be reimbursed from a 529 plan include not just tuition and fees, but housing and many supplies, like books and computers.
Doug Stokes from Stokes Family Office utilizes this strategy with wealthy clients, referring to them as “an under-discussed tactic from an estate perspective. They are one of the more powerful tools” for high-net-worth and ultra-high-net-worth families, especially those with multiple children and grandchildren.
529 plans allow an adult to set aside money for a beneficiary to use for education, whether related or not. The funds can cover various educational expenses, growing tax-free with after-tax dollars.
Stokes recommends maximizing a 529 by funding it with up to five years’ worth of tax “exclusions.” This amounts to US$36,000 per year for a couple. There is no limit on the number of US$180,000 gifts that can be made in a single year, allowing for efficient wealth transfer.
The adults cannot gift to the same grandchildren using the annual exclusion until the five-year period is up. Additionally, beneficiaries in school can receive up to US$30,000 each annually.
Stokes suggests collaborating with wealth managers and lawyers to optimize 529 strategies, much like handling withdrawals from a 401(k) before retirement. Changes in beneficiaries can be made penalty-free, offering flexibility for educational needs.
Some states provide tax incentives for 529 contributions, adding further benefits to the strategy.
Analyst comment
Positive news. The ability for wealthy grandparents to establish a 529 plan for a new baby with a significant amount of money allows for effective wealth transfer and education funding. Market impact: Increase in investments into 529 plans and potential growth in the education sector.
