529 college savings plans offer several attractive features for grandparents interested in saving for a grandchild’s education. Grandparents may appreciate the ability to retain control of their gifted assets while simultaneously reducing their taxable estate and potentially recognizing tax-free appreciation.
The annual exclusion allows for a grandparent to gift $14,000 to a grandchild in a calendar year without concern for gift tax. However, in some circumstances grandparents may want to consider 529 plan contributions in excess of the annual exclusion.
In most cases a gift in excess of $14,000 needs to be reported on a gift tax return. To the extent the gift exceeds the annual exclusion, the excess gift reduces your lifetime exemption (the amount that you can transfer tax-free to your heirs).
529 plans are unique savings vehicle in that a grandparent can elect to accelerate five years of funding by contributing $70,000 in a single calendar year without reducing their lifetime exemption or being subject to gift tax.
While accelerated gifting allows for funds to be invested in the tax-advantaged account sooner and may result in significantly greater tax-free appreciation, grandparents should be mindful of these three considerations:
• The accelerated gifting utilizes the annual exclusion for five calendar years. (A $70,000 gift in 2017 would use the exclusion for 2017, 2018, 2019, 2020 and 2021). Additional gifting in 2017-2021 would trigger gift tax consequences. These consequences include a reduction in the lifetime exemption and in the case of a grandparent gifting to a grandchild, an additional generation-skipping tax.
• The full amount of the accelerated gift is not immediately removed from the donor’s taxable estate. A grandparent who passes before the fifth year will have a prorated portion of the gift added back to their taxable estate.
• Grandparents who take advantage of the accelerated gifting provision need to make the election on the Federal gift tax form (Form 709) in the year of the gift. (See Schedule A, Line B in the instructions here.)
As always, there are less common considerations as well. Grandparents should be familiar with how any contribution (and especially accelerated contributions) may affect Medicaid eligibility.
Accelerated gifting to a 529 plan can be a very attractive opportunity but it is important to be mindful of the various tax implications prior to making the contribution.
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