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Estate planning and 529 plans

Estate planning for high net-worth individuals and couples involves finding ways to minimize the tax burden and complexity of wealth transfers. One under-appreciated tool is the 529 college savings plan, a way to help the younger generation pay for a Nevada college.

529s and estate planning

The most effective way to remove assets from an estate and therefore exempt them from most taxes is to place them into an irrevocable trust. However, this has the disadvantage that the original owner no longer controls the assets, so if anything changes, it is not possible to alter the beneficiaries or unwind the trust. That is a severely inflexible approach that can damage its viability. However, many people overlook the fact that 529 plans also provide estate separation, but they allow the owner to retain control over the assets.

How 529s help with estate planning

Money placed in a 529 plan needs to be used for school expenses, or else the recipient has to pay income tax and a 10% penalty on it. However, that can still allow for a significant amount of reserved money to be deducted from the estate while letting the owner change the contributions, change the beneficiary, and otherwise alter the plan on the fly. The owner can also use gift tax exemptions to front-load several years worth of gifts as 529 contributions, lowering the tax burden of contributions even more.

When it comes to estate planning, 529 plans offer many of the advantages of irrevocable trusts while reducing the downsides at the expense of narrowing how the money can be used by the recipient down the line.