529 Plans for Grandparents


Nearly two-thirds of grandparents, according to a survey by a major investment firm, indicated a desire to contribute to their grandchildren's education. 529 plans provide a tax advantaged way to help fund a child’s or grandchild’s education, as well as a means of removing assets from your estate for estate tax reduction purposes.

Qualified withdrawals from 529 plans, when used for educational purposes, can be totally free from federal, and in some cases, state income tax as well. Now, a special 529 plan accelerated gifting provision allows an individual to gift up to $65,000 (or $130,000 combined for spouses who gift split) to a single beneficiary in a single year, without triggering the federal gift tax filing. In other words, if you are gifting to a 529 plan, you can accelerate five years of $13,000 gifts into one year. This provision requires that no further gifts be made to the same beneficiary during the five-year period, that accelerated gifting cannot be done over multiple years, and that the gift is treated for tax filing purposes as a series of five equal annual gifts. The special treatment is only for gifts to 529 plans, and provides an unusual opportunity to magnify both the educational and estate planning benefits of these accounts.

If you live in a different state than your grandchildren, or don’t know where they will choose to go to school, you needn’t worry. Your 529 account can be used at any qualifying educational institution, regardless of where it is located. Many vocational schools and foreign schools will qualify as well.

If your grandchild wins an all expense paid scholarship or decides not to go to school, you are permitted to change the beneficiary of the plan to another grandchild, a child, a relative, or even yourself. Qualified withdrawals for educational purposes will still retain the tax benefits. If your circumstances are such that you find you need the funds for non-educational purposes, you are still permitted to withdraw your contribution from a 529 plan. However, the gain will be fully taxable at ordinary income rates, and subject to a 10% penalty as well.

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