Parents and grandparents are always looking to make preparations for providing for the next generation. One of the most pertinent concerns families in Michigan have is saving for college for their children and grandchildren. A parent or grandparent may want to consider incorporating a 529 college savings account in his or her estate plan in order to begin saving for the education of the next generation while also avoiding tax liabilities.
These types of accounts allow for earnings to accumulate freely without having to be counted for federal income tax purposes. The beneficiary of the account will be allowed to withdraw funds from the account tax free once hitting college age. However, the withdrawals can only be used to pay for qualified college expenses. Although usually these accounts are created for the benefit of one’s family, familial relationships are not required to name somebody a beneficiary to a 529 college savings account.
In addition to preparing the next generation for the future, contributing to a 529 college savings account will also help the account holder’s estate as well. The amounts that one contributes to the 529 account will reduce one’s taxable estate since the contributions are counted as completed gifts for tax purposes. Therefore, these amounts qualify for the annual gift tax exclusion. In 2014 the permitted exclusion amount is $14,000; the 2015 amount is expected to remain the same.
On the other hand, this is only one part of a good estate plan in Michigan or in any other state. Other important legal documents typically include a will, trust and power-of-attorney. However, each of these estate planning tools must be tailored to fit one’s specific situation. Everybody’s estate planning goals are different, and each plan should be individualized for the best possible outcome.
Source: Market Watch, “Using 529 college savings accounts for estate planning“, Bill Bischoff, Oct. 7, 2014