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How a 529 plan can help you leave more to your loved ones

On Behalf of | Jul 8, 2024 | Estate Planning

If you’re a parent, you likely are familiar with 529 education savings plans. They’re a good way to save for upcoming educational expenses, and they offer a number of tax advantages.

If your child is now grown and has a child of their own, you may want to look at 529 plans again. They can be a useful estate planning tool to help with grandchildren’s educational goals while minimizing or even eliminating taxes on your estate that can eat up the assets you want to pass on to your loved ones.

The effect on your taxable estate

In addition to the federal estate tax, high-value Rhode Island estates are also subject to a state estate tax. While the threshold amount increases annually, this year, it’s close to $1,775,000. That’s considerably lower than the federal estate tax threshold of over $13 million. Anything over the threshold is subject to taxes before inheritances are disbursed.

By opening a 529 plan with a grandchild as the beneficiary, you remove any money you put in the account from your taxable estate. You are listed as the owner and your grandchild would be the beneficiary. You just want to be careful not to contribute so much annually that you trigger gift taxes.

Other tax benefits

Interest that’s earned on the assets in a 529 plan is not taxable. Neither are the distributions (withdrawals) when they’re made, as long as they’re used for a qualified educational expense. These include not just college tuition and fees but costs for vocational training and apprenticeships if your grandchild decides college isn’t right for them.

If you needed to use the money for other purposes – for example, if you had significant, unexpected medical bills – the money is yours to withdraw. However, in that case, the withdrawal would be taxable.

If you’re considering using a 529 plan, there’s a lot more to learn. It’s wise to find out more about the advantages and disadvantages of these plans and how they may fit into your larger estate planning goals. With experienced estate planning guidance, you can make the best decisions for you and your loved ones.