Frontloading an Estate Plan with 529 Contributions

by | May 26, 2021 | Estate Planning, estate planning for college students

“Under a tax-law exception this year, clients can make a lump-sum 2021 gift of up to $75,000 to fund 529 college savings account for a child or grandchild and claim a federal gift tax exclusion for the full amount,” Jeff Stimpson points outs in Financial Advisor. Big deal? Very. A gift of $75,000 frontloads five years’ worth of the standard $15,000 annual exclusion, meaning that contributors can significantly reduce the size of their estate without eating into their lifetime gift and estate tax exemption.

Why make 529 contributions upfront rather than spreading them over five years?

  1. Funds inside a 529 plan grow tax free (of both federal and state tax). In essence, the IRS is allowing you to make one big lump sum contribution and use the five annual gift tax exclusions all at once. over five years..
  2. Since 2017, 529 money may be used for elementary and high school tuition, not only for college. With a shorter time until the money is to be used, frontloading allows time for the money to grow.
  3. Individuals afraid of the impending “sunset” in 2026 of the gift and estate tax (and possibly sooner reductions under discussion by the Biden administration) are anxious to reduce the size of their estates, which they can do by making upfront 529 contributions for grandchildren, nieces, nephews, and others.
  4. A realistic look at the future cost of college for your child or grandchild demonstrates why it is important to squeeze every dollar of earnings out of each 529 plan, Investopedia cautions.

At Geyer Law, we are careful to add an important caveat when discussing frontloading 529 plans: The exemption applies to all gifts made in that year to each beneficiary. If you have made other gifts to that person in addition to the 2021 portion of the 529 contribution, the annual exemption will still cover only $15,000 per recipient.

When it comes to tax and estate planning, taking action now rather than later, JDSupra.com explains, would create the best opportunity to use the current exemption amount to avoid future significant estate tax on your wealth.

– by Ronnie of the Rebecca W. Geyer blog team