Donald M. Thompson - Wills, Trusts, and Estate Planning


Section 529 Qualified Tuition Programs and Other Education Cost Planning Programs

Section 529 Qualified Tuition Programs are regulated by both state and federal law. They allow for contributions in an amount reasonably necessary to pay for a beneficiary's higher education expenses. Some states have contribution limits. The contributor can be the account owner and should provide for a contingent account owner in case of disability. The account owner does not make investment decisions, but chooses among alternatives offered by the particular state's plan. There are no income limitations for contributors. Contributions are not deductible under federal tax law. The earnings of the fund are not taxable and withdrawals from the plan are not taxable if used for qualified educational expenses for the beneficiary. Illinois offers a deduction for contributions.

Contributions are subject to gift tax, but a special provision allows 5 years contributions to be made at one time and treated as made ratably over 5 years so they are covered by the annual exclusion. A spouse can join, so up to $110,000 can be contributed up front without gift tax consequences.

The plan assets are usually not included in the estate of the contributor. However, if the 5 years gift tax election is made they are included if death occurs within the 5 year period. If the beneficiary dies the assets are included in the beneficiary's estate.

The costs for managing these plans have been very high, but they are very popular anyway.

An alternative to a 529 plan is a Uniform Transfers to Minors Act account using a 2503(c) trust where the contributor can manage the investments from the beneficiary at lower costs. If the funds are invested in stocks or mutual funds that produce growth with little current income the fact that the income is taxable is not too important.

There are also some special income tax credits specifically for educational costs such as the Hope Scholarship Credit, the qualified tuition and related expenses credit and the lifetime learning credit.

See also the section on Coverdale ESAs .

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Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
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