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Estate planning isn't just for the super wealthy. While it's true that most Americans don’t need to be concerned about estate taxes due to the high exemption limit, that doesn't mean estate planning should be skipped altogether. For example, a well-considered gifting strategy could benefit some estates regardless of net worth. And a 529 Education Savings Plan account could be an important part of that strategy.

First, determine what is included in your taxable estate

Congress makes the federal tax policy, which defines the value of a taxable estate. But this value isn’t fixed, it fluctuates as tax laws change.

Adding together the components of an estate – a home, vacation or investment property, cars, boats, other toys, savings, investments and retirement accounts – shows that it may be possible that more Americans could be subject to the estate tax than they think.

In addition, while some states follow federal rules and exclude 529 Plan account contributions from a donor's taxable estate, some may have different thresholds and regulations. It's important to check the specific rules of the state where the donor resides to understand how 529 Plan account contributions are treated in the context of state estate taxes.

This is why a little estate planning might be a good idea – even for investors who don’t consider themselves wealthy.

Using a 529 Plan account as an estate planning tool

A 529 Education Savings Plan account is a tax-advantaged vehicle to save money for qualified education expenses incurred from kindergarten on. Earnings in a 529 Plan account are not subject to federal income tax and withdrawals to pay for qualified education expenses are also exempt from federal income tax. Below are several examples of how a 529 Plan account could be used as an estate planning tool.

  • Contributions to a 529 Plan account are immediately removed from a donor’s estate for federal estate tax purposes, reducing the potential for federal estate tax liability. And don’t forget, the account owner maintains control over those assets, including the ability to change beneficiaries.
  • 529 Plan account contributions may also be excluded from the donor’s assets in the state where the donor resides and some beneficiaries (depending on their relationship to the donor) have the potential to exclude 529 Plan accounts from their state inheritance taxes.
  • Naming a successor or contingent account owner may help 529 Plan accounts avoid the probate process, which, in the absence of a detailed estate plan, trust, or last will and testament, could delay transferring an estate.
  • Contributions to 529 Plan accounts enjoy special gift tax treatment. Amounts above the annual gift tax exclusion can be averaged over five years to avoid gift taxes on the initial investment.
  • In addition to Estate Planning, you can find information on other benefits of a 529 Plan account here.

Many investors see the value of using a 529 Plan account to help loved ones pay education expenses, but some miss the estate planning opportunities the accounts also provide. As with many financial planning issues, such ancillary benefits may not be obvious on the surface.

That’s why investors should consult with qualified legal, tax and investment experts before making any long-term planning moves.

If you have any questions, call one of our live U.S.-based investment specialists.

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