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Estate Planning Primer: Qualified Tuition Plans

One important part of estate planning is helping your children and grandchildren with the ever-escalating costs of their education. If they are already in school, you can do this by writing a check for their tuition directly to their educational institution. For younger children or grandchildren who are not yet enrolled, you may wish to delay giving them these funds until it is time for them to pay for college tuition costs. In this case, you have a few options, including making a gift into a custody account or into a trust that qualifies as a current gift under the Uniform Gifts to Minor’s Act. You can also choose to fund a Qualified Tuition Plan under IRC Section 529.

The two types of 529 programs are prepaid plans and savings plans. Unlike a Uniform Gift to Minors Act plan, the earnings on the assets in a 529 plan aren’t taxed until the funds are distributed, and distributions are tax-free up to the amount of the student’s qualified higher education expenses (defined below).

Prepaid Programs: Certain colleges make it possible for you to buy tuition credits or certificates at current tuition rates, even though the beneficiary (child) is not yet starting classes, locking in today’s rate for tomorrow’s education. Through this program, if a child is accepted into college and will start next year, you can purchase tuition credit for all four years at the current year’s rate. This can save a lot of money if tuition costs are rising quickly but isn’t a good option if tuition costs are declining.

Savings Programs: As is the case in a Traditional IRA or Roth IRA, the amount for tuition in a savings plan will depend on the investment performance of the money put into it. If it grows, more of the cost of tuition can be covering by this program, and the opposite is true if it declines. It’s better to be conservative if the deadline for distribution is quickly approaching.

Qualified higher education expenses: The following are considered qualified higher educational expenses:

  • Tuition (including up to $10,000 in tuition for an elementary or secondary public, private, or religious school)
  • Fees
  • Books
  • Supplies
  • Required equipment
  • Reasonable room and board (if the student is enrolled at least half-time)

Distributions in excess of these qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. Additionally, a 10% penalty tax is imposed.

Beneficiary: You will specify the beneficiary of the program when you begin funding it, but you can later change the beneficiary or roll over funds in the program to a different plan (for the same or a different beneficiary) without facing income tax consequences.

Eligible schools: Any school that is eligible to participate in a student aid program of the Department of Education, be it a college, university, vocational school, or other post-secondary school, is eligible for these programs. This includes most accredited public, nonprofit, and proprietary (for-profit) post-secondary institutions.

The contributions you make to the qualified tuition program are treated as gifts to the student and qualify for the annual gift tax exclusion amount ($15,000 per person per year for 2020) adjusted annually for inflation. If your contributions in a year exceed this amount, you can choose to take the contributions into account over a five-year period beginning with the year of the contributions. You can then contribute up to $75,000 ($15,000 x 5) per beneficiary currently without gift tax, and if you and your spouse both wish to contribute, you could give up to $150,000 per beneficiary. Keep in mind, however, any contribution limits imposed by the plan.

One final thing to remember in setting up a 529 program is the possibility that you yourself may be unable to make the distributions from it when it is time for your beneficiary to begin paying tuition, especially if they are very young or not yet born when you set up this program. In this case, you can designate an alternative custodian to make distributions for you, such as a parent if the beneficiary is your grandchild.

For assistance with your qualified tuition plan or other estate planning, contact us at Wilson and Wilson Estate Planning and Elder Law, LLC at 708 482 7090 for our main office in LaGrange, Illinois or at 847 656 8958 for our Northbrook, Illinois office.

https://www.forbes.com/sites/matthewerskine/2020/08/05/estate-planning-primer-qualified-tuition-plans/?utm_source=Justia%20Blogging%20Ideas&utm_medium=email&utm_campaign=ff15d08ff4-blogging_ideas_estate-planning_20200805&utm_term=0_dba88020e6-ff15d08ff4-406015381#1a428bff8d99

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