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529 Plans for Tax Savings & Asset Protection

Qualified State Tuition programs, more commonly known as “529” plans are a great way to save for the education of loved ones. Contributions to the plans enjoy deferral of income taxation. When distributions are taken for qualified education expenses, like tuition, the distributions are income tax-free—even better!

Normally, when a client has control over an asset, that asset is included in their taxable estate for estate tax purposes. For example, if I put money in a trust and I retain the power to change who gets those assets, the trust would be in my estate under Section 2038 of the Code. However, a 529 plan is unique among estate planning strategies. It allows the client to remove assets from their taxable estate and yet retain complete control. In fact, the client could even pull the money out for themselves (though they may pay a penalty on the earnings if the funds are not used for qualified education expenses).

What does bankruptcy have to do with 529 plans? 529 plans can be protected in bankruptcy under some circumstances. As long as the contribution is within the plan limits and is made at least two years before the filing in bankruptcy, the 529 plan is protected in bankruptcy.

So, a 529 plan can provide:

  • Income that is tax-free if used for education
  • Control for the client
  • Ability to take the funds back
  • Protection in bankruptcy

What other strategy can provide all this?

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