A 529 plan, or qualified tuition plan (QTP), is a special investment account that offers significant tax incentives when it is used to pay for education-related expenses. A QTP affords American families the opportunity to lighten their tax burden while saving for their child or grandchild’s college education. 529 plans

California’s 529 Plan

California’s 529 plan is a college savings plan that allows you to put money away for your child’s future education and offers tax breaks for those in a higher tax bracket. When using this plan, you can contribute money up to a certain amount every year without it affecting gift taxes.

Possible Expenses Paid by a California 529 Plan

  • The costs of primary or secondary schooling
  • College tuition
  • Graduate research purposes
  • Apprenticeship-type programs
  • Student loan repayment

The Three Types of QTPs

While state and federal law provide for the establishment of several different 529-type plans, they are typically three categories:

  • Prepaid tuition plans. A prepaid tuition plan allows for the grantor to pre-pay the costs of an in-state college education. Payments may be made in part or in whole.
  • Prepaid private college plans. The private college 529 plan is similar to most prepaid tuition plans; however, the only difference is that funds are intended for use at a non-public educational institution.
  • College savings accounts. College savings accounts are similar to Roth IRAs insofar as investments grow on a tax-deferred basis. Every college savings 529 plan offers several different investment options.

Every state and university has its own rules regulating the use of 529-type plans.

College Saving Plans and Estate Planning

The owner of a 529 savings account or prepaid tuition fund can send money for qualifying educational expenses to:

  • The account owner
  • A named beneficiary, who could be the primary account holder or a named beneficiary
  • A specified private school, college, or non-public university

While qualified tuition plans do not permit the transfer of assets upon death, they can still serve as an important estate planning tool when used in conjunction with other strategies. Since 529 plan contributions up to $16,000 do not count against the donor’s lifetime gift or estate tax exemptions, they can complement conditioned trusts and reduce the burdens of probate by reducing the grantor’s taxable estate.

Philip J. Kavesh
Nationally recognized attorney helping clients with customized estate planning guidance for over 40 years.
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