CAN YOU LEGALLY AVOID ESTATE AND INCOME TAXES? YES, WITH THE ASSETS IN A LEGACY 529 PLAN

How does this work?:

  1. Create a 529 college savings plan account (New York has an excellent program) and set your child as the beneficiary.  
  2. You can make a lump-sum contribution of up to five times the annual gift tax exclusion (5 times $15,000 is $75,000 in 2021), elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. 
  3. Invest in one or more of the diversified equity portfolio options.
  4. You can make changes to the beneficiary over time with no tax implications.  If your child has already completed their education, the beneficiary could be changed to a grandchild or another relative in the future.
  5. There will be no income taxes on any earnings spent on qualified education expenses.
  6. You retain control of the assets.  In the event you need the money back, you can take a non-qualified distribution and pay income taxes plus a 10% penalty on the gains (this is likely only a good option for emergency situations).
  7. There are no estate taxes due upon death.  Your successor will then oversee the account for the beneficiaries and can name a new successor and change beneficiaries.
  8. Confirm with your tax advisor that this plan will successfully achieve these objectives given your overall tax situation.
  9. Do the same for your spouse and double the tax savings.  And do the same for additional children…
  10. In order to get even more tax savings, repeat the above process every sixth year to a maximum contribution limit of $520K per beneficiary in NY (in other states the maximum is different) and think about educating as many of your future offspring as possible…

Benefits

  • $75,000 invested for 30 years earning the long-term average U.S. equity return of 10.2% per year grows to $1.4 million.  Avoiding estate taxes (Federal rate is 40% & NY is 16%) and income taxes can save $882,000.
  • Most family members and future family members are eligible beneficiaries.  Also, you can change the beneficiary of a 529 account to a child, sibling, cousin, niece/nephew and other eligible relatives.
  • Funding education expenses of your family and future family in a tax-free manner is an excellent use for a portion of your estate. 

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Source for all return data is “2020 Stocks, Bonds, Bills and Inflation Yearbook”, Roger G Ibbotson and Duff & Phelps. For our full disclosures, click here.

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