For many Illinois grandparents, one of the goals of estate planning is to help provide a better life for their grandchildren. They often do this by earmarking assets for their education.
One easy way to do this is by opening a 529 college savings plan in a grandchild’s name. These plans have multiple tax advantages for the beneficiary as well as the owner of the account.
Flexibility is an important advantage
While people often use 529 accounts to save for college tuition, the funds can be used for K-12 costs (kindergarten through high school). That means they can help a grandchild attend an exclusive private or religious school or a specialized school like one for kids interested in performing arts or STEM (science, technology, engineering and math).
They can also be used for trade schools and apprenticeships for those whose talents and goals don’t require a college degree. As long as the funds are used for one of the approved purposes, they aren’t taxable as income for the beneficiary.
Flexibility is a key advantage
These plans offer a lot of flexibility, so they can be modified as needed. For example, while only one person can be listed as the beneficiary, the beneficiary can be changed. Maybe the oldest grandchild ends up getting a scholarship and not needing all the money. A younger grandchild can be named the new beneficiary, and the money can go to them if and when needed.
A change last year brought even more flexibility. Any money in a 529 that has been open for at least 15 years can transferred to a rollover IRA in the beneficiary’s name. Therefore, if all of it wasn’t needed for an only grandchild’s education, it can be used to help them build up savings.
Tax advantages
As noted, a 529 plan provides numerous tax advantages to the account owner and potentially their estate. For example, any contributions (deposits) are no longer considered assets belonging to the taxable estate.
All states’ 529 plans vary, and people don’t have to get a 529 plan in their own state. However, some offer more advantages than others. For example, Illinois 529 plan contributions up to $10,000 ($20,000 for joint filers) are deductible on income taxes. Further, interest earned on the funds is exempt from taxes.
These are just some highlights of how a 529 plan can be an important part of estate planning for grandparents (and, of course, for parents). It’s smart to find out more about them and how a 529 can fit into a larger estate planning strategy. Seeking personalized legal guidance is a great way to get started.