Clients often seem to want to have their cake and eat it, too. They want to remove assets from their taxable estates, yet they want to control the assets, or even use the assets if they need to do so.
This year, we have an unprecedented opportunity for clients: the gift tax applicable exclusion is $5.12 million. But, clients are reluctant to make a gift and give up control. We used to tell clients to put their assets in an entity which they controlled, like an FLP, and gift away the limited partnership interests while retaining control of the general partnership interest. For a while, that seemed to work. However, after Strangi and its progeny, keeping complete control is no longer a viable strategy. The best that may be achieved safely is retention of control of day-to-day matters while relinquishing control over distributions of income and dissolution of the entity.
So, what’s a control-hungry client to do? What about a 529 plan? A contribution to a 529 plan is a completed gift and is not included in the estate of the donor, except to the extent the transferor had used future annual exclusions which for periods beyond the donor’s lifetime. This is a statutory safe harbor. IRC 529(c)(4). So, even if the transferor is the account owner with complete control, it is not in the transferor’s estate. Thus, the client can transfer the funds to the 529 plan and retain complete control. If the client has a setback and needs to retrieve the assets for their own use, they can do so.
Typically, 529 plans are touted for their income tax benefits. If the plan is used for qualified higher education expenses, such as tuition, the income and growth is tax-free, not just tax-deferred. Further, some states give a deduction or credit for contributions. However, even disregarding the income tax considerations, the 529 plan may be exactly what the client is seeking: A way to 1) maintain control, 2) reduce the taxable estate, and 3) retain the ability to regain the assets for their own use. Perhaps 529 plans really are estate planning’s Holy Grail, as I suggested in this article. The 529 plan is especially useful in today’s environment of the $5.12 applicable exclusion because many clients are feeling pressured and motivated to make gifts to take advantage of this limited-time opportunity—without giving up control or access.
In addition to the estate and gift tax attributes, there are other factors to consider in choosing a plan. Some characteristics, including the investment performance and the maximum allowable contribution, vary by plan, even within the same state. Other characteristics, such as asset protection attributes, vary by state.
Now, you can show your clients that there may be a way to have their cake, and eat it, too. But, they’ll need to do their homework in choosing a plan. They can get started on their research at savingforcollege.com.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128