You have the ability to carefully craft your legacy plan so you can provide for each of your loved ones in the most effective way. For some people, a lump sum cash inheritance will not be appropriate, and for minors, it isn’t impossible.
If you choose to do so, you can proactively take financial steps while you are living with your legacy in mind. An educational savings account would be a fantastic gift to give to younger loved ones, and we will look at the widely embraced solution in this post.
529 Savings Plans
The 529 plan has traditionally been looked upon as a college savings plan, but the rules were changed when the Tax Cuts and Jobs Act was enacted in December of 2017. Now, funds in a 529 savings account can be used for K-12 education as well.
However, the withdrawals for the K-12 option are limited to $10,000 per student, per year.
If you know how a Roth individual retirement account works, you can apply that structure to understand the 529 college savings plan. You contribute into the account after you pay taxes on your income, and distributions from the account are not subject to regular income taxes.
There is no limit to the amount that a college student can take out of the account each year, but there is a limit to the amount that can be contributed into one of these accounts. The limit is between $235,000 and $500,000, so it is considerable.
You can utilize the standard account which would give the student the ability to use the funds to pay for books, fees, tuition, room, and board at any college. There are also prepaid tuition plans that are offered by state university systems.
With the latter option, you purchase college credits that can be used to pay for any of the expenses listed above. A major advantage is the fact that you are locked in at the current tuition price.
If the first beneficiary does not utilize all the funds in the account, you can change the beneficiary, and this is another benefit. You can withdraw assets from the account for any reason, but there be a 10 percent penalty, and the earnings would be subject to taxation.
Estate Tax Efficiency
We do not have a state-level estate tax in California, but there is a federal estate tax that can impact high net worth individuals everywhere in the country. At the present time, you can transfer $11.58 million before the remainder would be subject to taxation.
This $11.58 million figure is going to sunset at the end of 2025 if there are no legislative changes in the meantime. If this happens, the exclusion will go down to $5 million adjusted for inflation, and this is something to keep in mind if a change could impact you.
In addition to the federal estate tax, there is a federal gift tax, and the $11.58 million exclusion is a unified exclusion. It applies to lifetime gifts and the estate that will be transferred after your passing.
There is also a $15,000 per year, per person gift tax exclusion that sits apart from the unified exclusion. You can give this amount to any number of gift recipients in a calendar year tax-free.
You could contribute $15,000 each year into 529 accounts to give tax-free gifts to your loved ones while you are still living. If you are married, you and your spouse can combine your respective exclusions to contribute $30,000 annually into any number of 529 accounts.
Schedule a Consultation Today!
We are here to help if you would like to develop a plan for aging that culminates in the appropriate passing of your legacy.
Each situation is unique, and there are many approaches that can be taken. When you choose our firm, we will work with you to devise a custom crafted plan that is ideal for you and your family.
You can set the wheels in motion if you give us a call at 310-337-7696, and there is a contact form on this site you can use to send us a message.