529 Plans and Oklahoma Estate Planning

One of the most commonly discussed issues when it comes to planning for college is how families will pay tuition. The U.S. News & World Report has found that the average annual tuition and fees at colleges from 2020 to 2021 was $21,184 for out-of-state public colleges and $35,087 for private colleges. Due to these substantial costs, it is understandable that some people decide to make paying for college part of their estate plans.

Some people decide to pay for college by contributing to 529 plans. These plans often prove financially advantageous because money contributed to them grows tax-free, provided these assets are used for qualified education expenses. Limits exist, however, to the amount that can be set aside for each beneficiary. To better prepare you for utilizing a 529 plan as part of your estate planning strategy, the following reviews some crucial details about these plans.

529 Plans Can Reduce Your Taxable Estate

Contributions to 529 plans are viewed as completed gifts from a donor to a beneficiary. Many times, the donor also holds the account and manages funds for the beneficiary. Later, when the account owner passes away, the account is often not included in the deceased individual’s estate.

Some Control of the Assets Placed in a 529 Plan are Retained

With most gifts, a person abandons all rights to assets contained in the gift and has no control over how it is used. Even after contributions are made to a 529 plan, the owner of the account retains control of the money in the account. This means that the person who creates the account retains the ability to decide how money in the 529 plan is invested. 

No Income Limit for 529 Plans Exist

Many estate planning structures involve strict limits. Because 529 plans do not have income limits, however, even high-income earners can continue to contribute to 529 plans and make the most of available tax breaks.

The Downside to 529 Plans

Unfortunately, 529 plans also come with various downsides. Some of the reasons to think twice about 529 plans include:

• 529 plans must be spent on only qualified expenses, otherwise, the account creator can end up facing additional taxes and penalties. 
• If the owner of a 529 plan does a rollover into another state’s 529 plan, any state income tax deductions as well as any previously claimed credits can be recaptured.
• The owner of a 529 plan must choose from a menu of investment options listed by the 529 plan. These options often static investment portfolios, individual fund portfolios, and age-based portfolios.
• 529 plans that are owned by a grandparent or anyone other than a student or parent are often ignored on the Free Application for Financial Student Aid. Distributions from a 529 plan owned by a third-party, however, are counted as untaxed income to a student and can reduce a student’s eligibility for financial aid.

Speak With a Knowledgeable Estate Planning Attorney

If you have questions or concerns about creating a 529 plan, one of the best things you can do is speak with a knowledgeable estate planning lawyer. Contact attorney Jim A Lyon today to schedule a free case evaluation.