Gifting is an excellent and underused strategy for estate planning for those who are concerned about taxes. For the wealthy, one option for gifting is to make contributions to a 529 college savings plan.
Financial planners and attorneys know that most of these contributions are made at the end of the year, but there is nothing preventing one from making those contributions earlier in the year. There are good reasons for doing so. Increased tax-free growth and a potential tax deduction are one reason. Another is that 529 plan contributions offer the opportunity to achieve some serious tax savings.
Under federal law, taxpayers are able to give up to $14,000 per person per year without incurring any gift taxes. For those who are working to reduce their estate tax liability but who do not want to incur gift tax, this $14,000 can be put into a college savings plan. When it comes to 529 savings plans, though, one can actually give five years worth of annual exclusions to an individual.
California is among the states in which taxpayers can receive an income tax deduction for contributions made to 529 plans. In California, the deduction can be taken only for the tax year during which the contribution is made.
Now that the estate tax exemption is currently so large—$5.34 million in 2014—there may be less reason for wealthy people to gift for estate tax minimization, but more people should still consider how gifting could accomplish some of their estate planning goals. Contributions to 529 plans can be a beneficial way to do that.
Source: Forbes, “Maximizing 529 College Savings Plan Tax Breaks,” Ashlea Ebeling, January 16, 2014.