Gifting strategies with 529 plans

Columbia Management, Investment Team | December 3, 2013

  • 529 college savings plans allow parents and relatives to implement advanced gifting strategies.
  • Contributions can be prorated over five years without incurring federal gift tax consequences.
  • With a 529 plan the account owner maintains control of the assets in the account even though contributions are considered completed gifts.

Parents and relatives can benefit from advanced gifting strategies available only with 529 plans. With the current annual gift tax exclusion of $14,000 per donee in 2013 for individuals and $28,000 for married couples, a one-time gift of up to $70,000 or $140,000, respectively, can be contributed and prorated over five years without incurring federal gift tax consequences. With a 529 plan the account owner also maintains control of the assets in the account even though contributions are considered completed gifts and are excluded from the account owner’s taxable estate. Please note that the donor must survive to the fifth calendar year after the contribution or a prorated amount will be included in their estate.

Let’s look at some examples.

Gifting 101

Meet the Johnston family. They have one son, Matt, who they hope will attend a highly regarded university one day. They have made modest contributions to a 529 plan for their son in prior years but know they need to do more to meet their full savings goal and ensure that Matt has enough resources to choose any school to which he is admitted. Mr. Johnston has earned a large bonus at the end of the 2013 work year and they want to contribute $28,000 of it to Matt. In a 529 plan, they can do this without any gift tax liability.

Chart: Total gift of $28,000 excluded from taxation

Matt’s parents avoid incurring federal gift tax in 2013 by staying within the annual gift tax exclusion for married couples of $28,000. The Johnston’s must file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. The form is used to elect gift-splitting between married couples, treating one-half of the gift as being made by each spouse.

Advanced gifting

Matt’s grandparents are comfortably retired and in a position where they would also like to make meaningful contributions to a college savings plan for their grandson. To maximize the five-year forward gifting provision and the special gift tax exclusions available with 529 plans, they contribute $28,000 at the end of 2013, and in 2014 they contribute $140,000 as a gift and elect to prorate over five years, effectively removing $168,000 from their combined taxable estate without incurring any federal gift tax consequences.

In addition, by using a letter of intent Matt’s grandparents are eligible for a breakpoint on their contribution (total minimum investment specified by the letter must be completed within 13 months of initial contribution).

Over two years, Matt has received $196,000 toward his future education without his parents or grandparents incurring federal gift tax consequences.

Chart: Grandparent's gift totals $168,000, excluded from taxation

To avoid gift tax consequences his parents and grandparents cannot gift to Matt, in a 529 plan or otherwise, over $28,000 in any single calendar year (unless the exclusion amount increases). Also, for tax purposes his grandparents must make an election to spread their gift of $140,000 evenly over a five-year period, using IRS Form 709.

Our college savings calculators can help you plan for future education expenses. Contact your financial advisor for more information and resources on education funding.