An Easy Way To Avoid Gift Taxes
It’s mid-April and that can only mean one thing… the tax man’s coming.
Hopefully you’re already done with your 2012 taxes at this point. But taxes aren’t something you should think about only one time a year.
If you want to keep the government’s sticky fingers out of your pocket, you need a plan.
One of the tools many parents and grandparents are using to avoid unnecessary taxes is the 529 plan. In short, a 529 plan is a tax-advantaged college savings plan. It’s a great tool for those hoping to help future students prepare financially for higher education.
The money in a 529 plan grows federal tax deferred like an IRA. And any money taken out to pay college expenses doesn’t get taxed either.
But that’s just part of the story… 529 plans can be a powerful estate planning tool as well.
Typically, an individual can gift up to $14,000 per beneficiary or $28,000 for married contributors each year. However, the 529 plan has a unique feature of accelerated gifting. This feature allows you to pack five years worth of gifts into a single year.
In other words, a couple can put a lump sum of $140,000 into a 529 plan without incurring any gift taxes.
This essentially moves the money out of your estate… but you still have control of it.
You see, the account owner, not the beneficiary, controls the assets in a 529 plan.
In fact, the beneficiary has no entitlement to the assets. They don’t get them when they turn 18, not when they go to college, not even when the account owner dies.
You have control of the money and you get to appoint who becomes the new owner of the account after you’re gone. So you don’t have to worry about 18 year old Susie or Billy dropping out of college and blowing the money you left them for college in Vegas.
What’s more, as the owner of the account, you can take money back out for your own personal use. But you’ll have to pay ordinary income tax and a 10% penalty.
Here’s the bottom line…
A 529 plan is the only investment that allows you to make an accelerated gift to remove the assets from your taxable estate and still maintain control of the assets.
There are a host of different college savings plans and each state has different options. Some of them, like iShares 529 Plan, use ETFs to meet the needs of different investors.
At the end of the day, if you want to help pay for your kids or grandkids college education, take a look at 529 plans. They’re a great tool and they’ll help you keep the tax man’s sticky fingers out your estate.
Good Investing,
Corey Williams
Category: ETFs
