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Should your estate plan include a 529 educational plan?

An individual may want his or her estate plan to include specific provisions for future educational costs. One of the easiest tools for accomplishing that goal is a tax-advantaged 529 savings plan. Yet according to a recent survey, many Americans are unfamiliar with this option. Today’s post explores the details of how to open, fund and utilize the tax benefits of these plans as part of an individual’s comprehensive estate planning.

For starters, it is important to understand that contributions to a 529 plan are not irrevocable. The owner retains control over the account, even to the extent of requesting all of the funds back. Any amount put in, however, lowers the individual’s taxable estate. The contribution limit varies by state, but generally ranges between $300,000 and $500,000 for each beneficiary.

A 529 plan does not offer a tax benefit to the owner, but the funds will grow tax-deferred. When the designated beneficiary wants to make a withdrawal for qualified, college-related expenses, he or she will not have to pay state or federal taxes.

There is a 1:1 requirement between the owner and beneficiary. That means that only one person can own a 529 account, and there can only be one beneficiary at a time. However, an individual can set up multiple 529 accounts. 

Finally, multiple individuals can contribute to a 529 plan, although there can be only one account owner. Since the owner retains control, the designated beneficiary can be changed at any time. In the event of the owner’s passing, a successor owner can be named without incurring tax penalties.

Source: U.S. News and World Report, “The Ultimate Guide to Understanding 529 College Savings Plans,” Kate Stalter, May 16, 2016

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