Paying for college is expensive; consider a 529 plan to defray costs.
Feb. 18, 2016 Whitepaper

Tax Advantages To Combining College Funding with Estate Planning

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When planning for a loved one’s education, it might make sense to combine college saving with estate planning. In this article, we examine three tax-advantaged saving options that, in addition to helping you save for educational expense, could also further your estate planning goals. 

529 Plans

These plans, named for the Internal Revenue Code (IRC) section that governs them, come in two types: the prepaid tuition plan and the college savings plan.

A prepaid tuition plan involves making payments today to guarantee that tuition (or a specific portion of tuition) will be covered in the future. Prepaid tuition plans may be offered by states or private educational institutions. State plans are usually accepted at any college or university in that state’s system.

Regardless of whether you choose a state or private plan, it may be possible to transfer your prepayment from one school to another. Doing so may have additional costs, however, because some plans charge a penalty equal to a percentage of the tuition’s value. In addition, even if the plan doesn’t charge for the change, the school of choice may be more costly than the school for which you’ve prepaid, leaving a funding shortfall.

A 529 college savings plan is often a better option. Contributions go into a tax-deferred account that is generally invested in mutual funds (though investment choices are limited to those offered by the plan). Withdrawals are free from federal income tax when used for qualified higher education expenses at eligible institutions, as defined in IRC Sec. 529.

Examples of qualified costs include not only tuition and fees, but also:

  • Books, supplies and equipment required for attendance
  • Room and board, subject to limits, for a student enrolled on at least a half-time basis
  • In the case of a special needs beneficiary, expenses for special needs services incurred in connection with enrollment or attendance

The list of eligible institutions includes virtually every accredited college and university in the United States, as well as many foreign institutions.

State tax treatment varies, and some states offer income tax incentives for contributing to their plans.

529 plans offer significant estate planning opportunities. For example, gifts to 529 plans are eligible for the annual gift tax exclusion of $14,000 per beneficiary. This means that you may avoid the gift tax liability without having to use up any of your lifetime gift tax exemption. It also means that you may avoid any generation-skipping transfer (GST) tax liability that may otherwise be incurred when, for example, a grandchild is the plan beneficiary, without using up any of your GST tax exemption.

529 plans also allow flexibility in funding, as contributions can be made either periodically or as a lump sum. For example, you can front-load five years’ worth of annual exclusion gifts ($70,000) in one year. Married couples splitting gifts can double this amount to $140,000 per beneficiary. However, if you die within five years of the gift, a portion of the upfront gift will come back into your estate.

Direct payment of tuition 

One of the best ways to combine estate planning and college funding is to pay tuition on behalf of the student. Gifts of tuition paid directly to the institution are exempt from gift tax without counting as annual exclusion gifts or using any of your lifetime gift tax exemption. They also are exempt from GST tax without using any of your GST tax exemption. 

Do your homework 

You can use education funding tools to also achieve estate planning goals. But choosing the combination that is right for you requires careful study. Your Mariner team is available to answer your questions and create an educational funding strategy that meets your specific goals. 

Financial Aid

How is financial aid affected by the various college savings plans and by other gifts? There are two aspects of financial aid: 1) federal assistance and 2) assistance generated through the institution itself. Institution-based aid calculations can vary greatly.

With federal assistance, student-owned assets are generally included at a higher percentage than a parent’s assets. There are exceptions. For example, a student-owned 529 plan is included at the parent’s percentage. But if a grandparent owns the 529 plan, the plan is excluded and is counted as student income.

Check out our Navigating Your Financial Future podcast about college savings plans. iPhone users can listen HERE. Other devises can listen HERE.


This document is for informational use only. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.