Qualified State Tuition programs, more commonly known as “529” plans are a great way to save for the education of loved ones. Contributions to the plans enjoy deferral of income taxation. When distributions are taken for qualified education expenses, like tuition, the distributions are income tax-free—even better!
Normally, when you have control over
an asset, that asset is included in their taxable estate for estate tax
purposes. For example, if you put money in a trust and I retain the power to
change who gets those assets, the trust would be in my estate under Section
2038 of the Code. However, a 529 plan is unique among estate planning
strategies. It allows you to remove assets from their taxable estate and yet
retain complete control. In fact, the client could even pull the money out for
themselves (though they may pay a penalty on the earnings if the funds are not
used for qualified education expenses).
In addition to Estate protection,
there is not Bankruptcy protection as well. What does bankruptcy have to do
with 529 plans? Now, 529 plans can be protected in bankruptcy under some
circumstances. As long as the contribution is within the plan limits and is
made at least two years before the filing in bankruptcy, the 529 plan is
protected in bankruptcy.
So, a 529 plan can provide:
- Income that is tax-free if used for education
- Control for the client
- Ability to take the funds back
- Protection in bankruptcy
What other strategy can provide all
this? If 529 plans were Estate Planning’s Holy Grail, maybe now they are Asset
Protection’s Holy Grail, too.
