A 529 Plan is a popular college savings plan designed to assist families in saving for future college expenses. These specific plans were first added to the Internal Revenue Code in 1996 and are named for that section of the code. These savings plans have many benefits, but one concern some clients have is whether the account will be considered a countable asset by Medicaid. Our Los Angeles Medi-Cal planning attorneys will explain the benefits of these plans and how they affect Medicaid eligibility.
Nationwide use of 529 plans
One of the great benefits of a 529 college savings plan is that it can be used nationwide. Although each state establishes the plan, it can be used at any college your student attends in the United States. In other words, as a California resident, you can invest in a 529 plan for your grandson and he can use it to attend college in Wisconsin. The only catch is making sure that the institution they attend is eligible under the applicable 529 rules.
Gift & estate tax consequences for 529 plans
The gift and estate tax consequences associated with 529 plans can be good and bad. Contributions to a 529 plan qualify for the $14,000 annual gift tax exclusion which allows many individuals to make relatively significant contributions while avoiding gift taxes. However, because the contribution is considered a gift to a named beneficiary, which can have different consequences with regard to the generation-skipping transfer tax.
Will a 529 account be counted as an asset when I apply for Medi-Cal benefits?
A common question from grandparents who open a 529 account for their grandkids is what happens to their Medi-Cal eligibility if they need to go into a nursing home? Our Los Angeles Medi-Cal planning attorneys can help you answer this question, as it depends on various factors. For instance, states that still consider assets when determining Medicaid eligibility after the Affordable Care Act was passed will still consider a 529 plan as a “countable” asset.
A 529 plan allows you to regain possession of the funds so, for that reason, those funds are considered countable assets for paying nursing home and other expenses under Medicaid. If you are concerned with future Medi-Cal eligibility, then you should discuss your decision to open a 529 account with one of our Los Angeles Medi-Cal planning attorneys. One option is to let someone else be the owner of the 529 account. However, remember that if you later transfer ownership of that account to someone else, the Medi-Cal “look-back” rules may result in a penalty.
What happens to a 529 plan if the owner dies or becomes incapacitated?
When 529 accounts are created, you are given the opportunity to name a successor owner, which is always a good idea. If you take that opportunity, then your 529 account will not terminate upon your death or incapacity. Instead, it will be maintained by the new account owner. This option allows ownership of the 529 account to be transferred simply and automatically to the designated successor.
However, if a successor owner is not designated, probate proceedings may be necessary in order for the court to appoint a successor owner. Some 529 accounts, on the other hand, include rules of succession that spell out what happens if a successor is not named.
Consider your choice for successor carefully
It is important to remember that successor owners will assume the rights of the original account owner. This includes the right to request a refund. Consequently, when choosing a successor you should be confident that person will fulfill your wishes regarding how the 529 account will be used. If you have questions or concerns about choosing a successor, discuss those concerns with our Los Angeles Medi-Cal planning attorneys.
Some benefits of using 529 plans
Using a 529 plan to pay for a loved one’s college tuition has many benefits. For instance, if you wait until your grandchild’s tuition needs to be paid before making the gift, then you run the risk of passing away before the tuition can be removed from your estate. Also, the gift tax exclusion that would apply to direct tuition payments only applies to the tuition. It does not apply to any other costs for college that would be covered by a 529 plan. The college account can cover room and board, supplies, books and other school-related expenses.
Possibly the most important consideration is that direct payments of tuition are often counted as resources which will most likely reduce financial aid. However, with a 529 plan, you can request that the payment is made directly to the student as opposed to the school which may be more beneficial in terms of financial aid eligibility.
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