Education (529) Savings Plan Trust
Legislation enacted through the Small Business Job Protection Act of 1996 created a significant opportunity for taxpayers wanting to build college-expense-relief trust funds. A combination of aggressive tax savings, control, and flexibility makes the 529 Education Savings Plan Trust a structure for serious consideration for any parent, grandparent, uncle etc. wanting to help generously meet the college expenses of a family member.
The 529 Plan developed into a dollar-funded account (from a previous “credit” plan) that gives state-appointed administrators custodial duties over the accounts regardless of where (in whichever state) the college-expense related withdrawals would eventually be used. Cash can now be contributed to designated 529 accounts, which can then compound with tax-free dollars until qualified withdrawals are made to pay for college-related expenses.
The concept of the 529 Plan is revolutionary to estate & tax planning in that it allows the account-owner nearly maximum control of an established 529 account. The control features include the account-owner’s right to withdrawals up to 100% of the account funds, and the ability to terminate the account (subject to a 10% penalty on non-qualified withdrawals - but only on the earnings in the account) without it being in the owner/contributor’s estate for transfer tax purposes.
Because of the vested right of the account owner to transfer ownership of a 529 account (without a taxable event), a 529 account-owner may transfer his/her 529 account(s) to a special sub-trust of his/her Revocable Living Trust (RLT) wherein the RLT will maintain the qualification provisions of the 529 account inside the trust. A living trust appears to be a wise choice for holding 529 accounts seeing that essentially maximum control may be retained by the grantor. Probate and other administrative problems associated with account-transfer powers would be avoided which otherwise may occur without a RLT in place with the 529 account. However, special provisions creating a special sub-trust must be installed in the controlling RLT to avoid disqualifying the 529 accounts being held by the RLT.
RLTs provide unlimited, unrestricted, and non-penalized revocation powers to the grantor including (i) a very broad range of asset choices that can be funded to the trust, (ii) unlimited and unencumbered withdrawal rights to the grantor without penalization, (iii) aggregated accounting methods, (iv) few restrictions on investment/allocation powers and directives that can be employed by the trustee, (v) secured hypothecation or pledging of assets, (vi) no limitations to contribution amounts, (vii) that transfers are not deemed as a taxable gift, and (viii) no restrictions on the number of beneficiary designations. Conversely, a 529 owner may not retain such unrestricted control over the account. That is why special provisional features must be incorporated into the RLT draft if the RLT is to hold the 529 account(s).
The (grantor of a) RLT can meet all the requirements and enjoy all the benefits of 529 succession-ownership planning as long as the requirements described by law to qualify the 529 account(s) for the duration and life of the account(s) are upheld and maintained in the RLT. This can be accomplished with our special Educational Savings Plan “Add-on Sub-Trust” to the RLT.
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