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Section 529 Plans for Grandparents

November 15th, 2007 at 07:56 am

As you may already be aware, a Section 529 College Savings Plan is an excellent method of saving for a child’s college education.

The funds invested in a Section 529 College Savings Plan will grow on a tax-free basis and, when used for secondary educational expenses, can be withdrawn with no taxes ever paid. By never paying taxes on the plan's income, you are effectively buying educational services at a “discount”, equal to the combined federal and state taxes that you would have paid on the plan’s growth.

What you may not know are the benefits that Grandparents have when setting up a Section 529 Plan. The person that sets up the plan is the plan owner, with another person named as the plan beneficiary.

Setting up the plan is considered a completed gift to the beneficiary and is covered by the federal gift tax annual exclusion of $12,000. However, with a 529 Plan, you may elect to make a gift of up to 5 times the annual exclusion rate, allowing up to $60,000 to be given to each beneficiary or $120,000 if your spouse agrees to “gift splitting”.

If you or your parents or grandparents are concerned that their estate may someday be required to pay estate taxes, this is an excellent way of removing up to $120,000 for each grandchild from the estate, and avoid all gift and estate taxes.

The unique part of a 529 Plan for Grandparents is that, even though the funding is treated as a completed gift, the owner has virtually complete control over the 529 Plan funds. In the future, the owner can change the beneficiary to anyone in their direct family tree.

The owner can even ask for the money back, if their finances change. If the owner asks for the money back, they must pay ordinary income taxes plus a 10% penalty on the 529 Plan’s gains and income. However, all of the money in the plan will come back to the owner.

The Section 529 College Savings Plan is the only plan that I know of which allows giving money away as a completed gift and still maintaining virtually complete control over the funds. The owner can even choose the successor owner of the plan, if the owner dies.

For more information on the benefits of a Section 529 Plan and how to choose the best plan for your needs, go to www.savingforcollege.com.

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