Our first article on college 529 plans and asset protection generated a lot of questions that we’re going to address in a series of articles. College 529 savings plans were created by an amendment to the Internal Revenue Code in 1996. These plans can be operated by states or by educational institutions, and they are designed to help families save for college while taking advantage of certain tax breaks.
529 Plans Are Universal
At this point, each of the 50 states operates at least one 529 plan. These plans are universal. That means you can live in Florida, invest in a Texas 529 plan, and send your child to college in California. This is important because plans are protected differently in each state. In other words, not all 529 plans are created equal. While the plans get similar tax treatment, they differ from plan to plan on other critical features and benefits, so it makes sense to spend a little shopping for plan that meets your overall goals in terms of saving and protecting your wealth.
Savings versus Prepaid Plans
Plans come in two varieties. 529 savings plans are similar in form to 401(k) plans or IRA accounts in that your savings will move up and down according to the investments you make. The second type of 529 plan is the prepaid tuition plan. A prepaid tuition plan locks in your tuition at a set rate for in-state colleges. Funds in prepaid plans can be converted for use in out-of-state or private colleges, but you might lose the benefit of having a lower rate of tuition “locked in.”
Tax Benefits
Beyond the asset protection benefits of 529 plans discussed in our previous article, there are a number of tax advantages to saving for college. For one, large contributions to 529 plans–contributions ranging from $13,000 to $65,000–can be treated as though they were made over a five year time period. This is very beneficial from a gift tax perspective. In addition, you have the ability to maintain investment control over assets that have actually be removed from your estate.
Many Tiered Approach
The asset protection strategies we pursue at Lodmell & Lodmell have many layers. We help clients form LLCs and limited partnerships to protect assets, and we often make use of offshore asset protection trusts, but before pursuing those strategies, we work to make sure that you’ve maximized asset exemptions, which is the most cost effective way to put your assets beyond the reach of potential creditors. Depending on the state where you live (or the state in which you choose to invest), college 529 plans can provide a good layer of protection for assets that you wish to set aside for college tuition.
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