BY: Mindy S. Hirt, CFP® | Senior Vice President & Wealth Advisor, Argent Trust
School’s out for summer, but the time to plan for future educational expenses is now. Benjamin Franklin once said, “An investment in knowledge always pays the best interest.” That sentiment often motivates many of our clients to help the next generation fund their educational pursuits. The best way to achieve this goal differs for each family, but here are some of the ideas that are typically discussed:
Pay as you go: If your children or grandchildren are ready to head to school and need assistance, you can pay their tuition directly to the institution. This gift does not count against your annual exclusion ($18,000 in 2024) or lifetime exemptions, making it a great way to reduce taxable estates. Keep in mind that room and board and other related expenses are likely not exempt for gift tax purposes.
Fund a 529: For individuals who would like to help existing family members in the future, funding a 529 now may be a great option. These tax-advantaged savings plans can be used for a broader list of qualified college expenses, including tuition, fees, books, computers, room and board. They can also be accessed to pay up to $10,000 per year of K-12 tuition. Investment options in 529 plans have grown over the years but are still limited.
Super-fund a 529: One unique funding benefit to 529s is that you can super-fund them by front-loading five years of annual gifts in one year. This means that an individual can fund $90,000 per person (based on the maximum annual gift in 2024 of $18,000). You can reduce your estate by $450,000 if you have five grandchildren. If you are married, you can double this amount. If you super-fund a 529, keep in mind that your gifts are spread over a five-year period (20% per year). That means you will need to plan accordingly, especially if you typically give outright gifts or fund a trust for the same person, as you may be exceeding the annual exclusion amount. If you pass away during the next five years, the remainder will be included in your taxable estate, but the growth in the account will not be included.
New tax law help: Some donors have concerns that the funds will not be needed for education either because the beneficiary does not attend college or because they are able to get merit or financial aid. As of 2024, a beneficiary of a 529 can roll up to $35,000 into a Roth IRA without the 10% penalty that would otherwise be charged for non-qualified withdrawals. The rules are the same for funding a Roth directly – you have to have earned income and stay within the annual contribution limits ($7,000 in 2024 if under 50). There is one other option for funds that are not used by a beneficiary. They can be transferred to another relative, but if the new beneficiary is from the younger generation, the transfer will be considered a taxable gift.
Create a trust for more flexibility: For those concerned that 529s are still too restrictive (in terms of investments or future use without penalty), a family trust may be a more flexible option. While growth is not tax-free, a trust can be funded to support multiple loved ones for various needs, including, but not limited to, education. Another advantage to a family trust is that it can be funded for future generations that have yet to be born. They can be funded with a variety of assets and are a great vehicle for leaving a lasting legacy.
Consider a hybrid approach: Clients often combine these strategies to maximize the benefits to family members and minimize future estate taxes. An example would be paying tuition directly to the university and using a 529 or trust for room and board or other qualified expenses.
Ready to take the next step? To learn more about these various techniques and what is right for your family, please contact an Argent Trust representative. We’re here to help you make the best financial decisions for your family’s future.
