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"Is a '529 Plan' a Smart Way to Fund   

Your Child's College Education?" 

 

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Estate Planning Update
January 2012
Greetings!

Establishing a Qualified Tuition Program, more commonly known as a "529 Plan," may be a very advantageous way to fund the cost of your child's or grandchild's college education.

What are the benefits of establishing a 529 Plan?

 

* Earnings on the investments held in a 529 Plan accumulate tax-free.

 

* No income tax is due on distributions from a 529 Plan that are used for qualified higher education expenses (tuition, books, supplies, room and board) at an eligible higher education institution (most accredited two-year and four-year colleges and universities).

 

* You are no longer subject to estate tax on the funds that you contribute to a 529 Plan, even though you still own and control those funds.

 

How much can you contribute to a 529 Plan without incurring wealth transfer taxes? 
 
* Currently, a taxpayer may gift up to $13,000 annually to each recipient without making a taxable gift. This amount is referred to as the "annual exclusion gift." Together, a married couple may contribute up to $26,000 annually to a 529 Plan for each of their children or grandchildren without incurring gift tax or generation-skipping transfer tax.

* Perhaps the most significant benefit offered by a 529 Plan is that a parent or grandparent may contribute up to 5 years' worth of annual exclusion gifts at one time without incurring any wealth transfer tax, provided that the donor files a timely gift tax return and does not make any other gifts to the same recipient within 5 years. Together, a married couple may contribute up to $130,000 at one time to each child's or grandchild's 529 Plan. The fact that a 529 Plan may be front-loaded with 5 years' worth of annual exclusion gifts at no transfer tax cost offers you an opportunity to leverage the powerful benefit of compounded earnings, especially if you do so when your child or grandchild is relatively young!

What are the potential drawbacks of a 529 Plan?
 
* Any earnings that are withdrawn from a 529 Plan and spent on non-qualified expenses are subject to a 10% penalty in addition to the income tax due.

* The funds that you contribute to a 529 Plan are subject to the same  risks present in all investment accounts. However, investment options are more limited in a 529 Plan than in a regular brokerage account; and you are permitted to change your investments only once each year unless you change the beneficiary of the account.

* If you front-load a 529 Plan and die before the end of the 5-year period, a portion of your contribution will be included in your gross estate.

Please contact me at 323.654.9513 or brookspaley@paleylaw.com if you would like to discuss any aspect of your current estate plan.

Brooks Paley, J.D., LL.M.
About Paley Law Corporation
Brooks 0168

Paley Law Corporation is based in Los Angeles and specializes in providing personalized, sophisticated estate planning and related legal services.  Brooks Paley, J.D., LL.M., is the managing principal of Paley Law.  Brooks is quoted in the June/July 2011 issue of Working Ranch Magazine ("Death Tax Tips") on the impact of the estate tax on family-owned businesses and tax planning opportunities available to them.

The above material is provided for general informational purposes only and is not intended to constitute legal advice in any particular matter. Transmission of this material does not create an attorney-client relationship. Paley Law Corporation does not warrant the content of this material and is not responsible for any errors or omissions associated with it.

To ensure compliance with requirements imposed by the Internal Revenue Service, Paley Law Corporation informs you that any U.S. tax advice contained in this communication (including any links to other websites or material) is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

    

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2012 Paley Law Corporation