CLIENT
Paying it
Forward
Funding a 529 plan for a grandchild
can offer estate tax benefits for
wealthy clients — plus feel-good
rewards. By Donald Jay Korn
Brendan Kelly’s clients were a married couple in their 60s. Both were still work- ing. Financially, they were
ready for retirement, says Kelly, president of Somerset Capital Advisors in
Berwyn, Pa. At Kelly’s recommendation, the couple opened 529 accounts
for each of their four grandchildren.
“Besides the tax benefits, they’re
enjoying a nice, warm feeling because
they’re able to help out,” Kelly says.
Grandparent-owned 529 accounts
offer distinct advantages. Clients concerned about estate taxes can move
large sums from their estate, tax-free.
They can help trim college costs for
their progeny. And there’s security
knowing that money in 529 plans can
be redeemed, if necessary, often with
a modest tax bill.
“We always propose 529 plans to
clients who are grandparents,” says
Paul Dixon, senior vice president at
Sovereign Investment Group in Hous-
ton. “Almost half of those clients have
529 plans. They like the idea of mak-
ing the gift of education, rather than
buying their grandchildren computers
or some other electronic item.”
Five in one
For grandparents as well as parents, contributions to 529 plans are
treated as gifts. They’re subject to
the annual gift tax exclusion, which
means that a client can give up to
$13,000 to each beneficiary this year
with no gift tax consequences. Kelly
says his clients with the four grandchildren plan to donate $13,000 a
year to each one. The exclusion will
rise to $14,000 in 2013. (Exemption
from state taxes varies.)
That means theyll remove $52,000
from their taxable estate in 2012, free
of gift tax, with four 529 contributions.
If both spouses contribute that same
amount, they can give $104,000.
That’s not even the maximum cou-
ples can give. Each person can contrib-
ute up to five years’ worth of gift tax
exclusion to a 529 plan, Dixon says. “It
can be a huge tool for estate tax plan-
ning, and it will become more useful if
the estate tax exemption is reduced,
as now scheduled,” he says.
Financial-Planning.com
December 2012 Financial Planning 87
