In General Estate Planning

Almost every time I pick up the newspaper I read about funding cuts or tuition hikes for Louisiana colleges and students. For those of us with college-aged students, the good news is that TOPS still exists, but for those planning for a younger child, this wonderful benefit might not be available. Therefore, it’s very important for parents and grandparents to understand the different options available for paying for post-secondary education so they will choose the right vehicle to fund their child or grandchild’s education. This month, we will discuss one of my favorite ways to save for post-secondary education — the 529 Plan.
A 529 Plan is an educational savings plan operated by a state or an educational institution that is authorized under Section 529 of the Internal Revenue Code. There are two types of plans: prepaid tuition plans and college savings plans. This article will discuss the college savings plan. These plans allow you to contribute funds to an account for a “beneficiary” to use for “qualified educational expenses.”
Qualified educational expenses include tuition, books, supplies and equipment required by the student who is enrolled in a “qualified educational institution,” which is defined as any college, university, vocational school or other post-secondary institution eligible to participate in a student aid program administered by the U.S. Department of Education. This includes virtually all accredited public, private and proprietary schools. Any school should be able to tell you if they are a “qualified educational institution” for 529 purposes. The costs for room and board are also qualified, as is special needs services needed by special needs students in connection with enrollment at a qualified educational institution.
529 Plans also offer tax benefits. Like and IRA, the funds in a 529 account grow free from any federal income tax. However, unlike an IRA whose funds are taxed upon distribution, distributions to pay for the student’s qualified educational expenses are also free of income tax. Louisiana’s 529 Plan, called the START Saving Program, also offers tax-free growth and a tax deduction for Louisiana residents for contributions made to the state’s plan. Unbelievably, Louisiana also matches its residents contribution to a START Saving Program account by annually matching a percentage of the deposits made to an account during the calendar year, depending upon the category into which the account has been classified and the federal adjusted gross income reported by the Account Owner for that year. This match is called an Earnings Enhancement.
In addition to the great tax benefits and earnings enhancement, as the owner of the account you stay in control of it. With few exceptions, the named beneficiary has no rights to the funds. You are the one who decides when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire although the earnings portion of the “non-qualified” withdrawal will be subject to income tax and an additional 10% penalty tax.
529 plans are also unique in that people can retain control over the plan’s assets and yet remove those assets from their estate for estate tax purposes. This type of control typically means the asset would be subject to estate tax, but not with a 529 plan. Further, you can move money out of your estate faster by contributing to a 529 plan than with regular annual gifting to your children or grandchildren. In 2011, there is a $13,000 annual exclusion ($26,000 for married couples) allowing you to give $13,000 to any individual without reporting that gift to the IRS. A 529 plan allows you to make 5 years of annual exclusion gifts up front; thus, you can invest up to $65,000 per beneficiary ($130,000 per beneficiary for married couples) without paying gift tax. If you live for at least five years, these assets will not be subject to estate tax either.
The following websites provide additional valuable information about 529 plans:,, and (provides information about Louisiana’s plan). While 529 plans are an excellent way to save for college and post-secondary education and can provide many other estate planning benefits, the tax rules can be complicated. Therefore, you should consult with estate planning professionals familiar with 529 plans to see if they will benefit you, your children and/or your grandchildren.

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