The Benefits of 529 Savings Plan for Estate Planning

 Posted on December 11, 2015 in Uncategorized

In light of the cost of college tuition and other associated expenses, it is never too early to start your children's or grandchildren's college fund. In fact, one option for savings—529 college savings plans—can actually offer estate planning benefits, as well.

The 529 savings plan debuted in 1996 as a way to set up an educational savings plan without having to pay federal taxes on any interest that is earned by the account. The plan gets its name from Section 529 of the IRS tax code.

There are two different types of plans. The first is the college savings plan. Like other types of financial savings plans, the funds that are deposited in this type of account are typically invested in bond mutual funds, stock mutual funds, money market funds, and other portfolio investments. These funds can later be used at any college or university. It is important to note that these funds are not federally insured or guaranteed by the state.

In the majority of states, you do not have to be a resident of the plan you invest in, nor does your child have to attend school in that state either. For example, a person can live in California, invest in New Hampshire's plan, but their child ultimately decides to attend school in Virginia.

The second type of plan is pre-paid tuition. With this type of plan, a person can pay future tuition costs, and some plans even allow upfront payments for room and board costs. These plans typically have a state residency requirement to participate and are usually guaranteed by the state.

Illinois currently has three 529 savings plans. The state also has a prepaid tuition program available. However, that program is only open to residents of Illinois.

When it comes to estate planning benefits, grandparents can set up 529 savings plans in their grandchild's name. These funds are then removed from taxable estate funds, yet the grandparents still maintain full control of the funds, as well as withdraw the funds at any time. There is a 10 percent penalty for an early withdrawal.

If you would like more information regarding 529 savings plans, or have any other estate planning needs, please contact an experienced DuPage County estate planning attorney today. Contact the law firm of Stock, Carlson & Asso. LLC, at 630-665-2500.

Sources:

http://www.savingforcollege.com/529_plan_details/index.php?state_id=14&page=plans_by_state

http://money.usnews.com/money/personal-finance/mutual-funds/articles/2014/09/03/the-ultimate-guide-to-understanding-529-college-savings-plans

http://www.sec.gov/investor/pubs/intro529.htm