Case Study

A 529 plan can be a powerful estate
planning tool for grandparents

Jim and Judy have built up a large net worth and are concerned about estate taxes. They have six grandchildren and are looking for tax-advantaged ways to transfer assets to them. But they’re concerned about giving up control of the assets.

Their tax advisor suggests that they set up a Section 529 college savings plan for each grandchild. They can retain control of the accounts, even after their grandchildren reach the age of majority. Because contributions to 529 plans are eligible for the $14,000 per beneficiary annual gift tax exclusion, and annual exclusion gifts are also excluded from the generation-skipping transfer (GST) tax, they can also avoid any GST tax liability that may otherwise be incurred when transferring wealth to a grandchild — without using up any of their combined $10.90 million GST tax exemption.

Plus, they can take advantage of the special break for 529 plans that allows up to five years’ worth of annual exclusion gifts ($70,000 per beneficiary) to be front-loaded into one year, doubling to $140,000 for married couples splitting gifts.

So Jim and Judy can transfer as much as $840,000 this year and not use any of their lifetime gift tax exemptions or GST tax exemptions. But if either of them dies before 2021, that spouse’s estate will include a portion of the gift made in 2016. That amount will also use up part of the spouse’s GST tax exemption or be subject to GST tax, because it no longer will be considered an annual exclusion gift.