Are there estate planning implications to contributing to a Section 529 plan?
Amounts contributed to a Section 529 plan are no longer considered to be your property and, as a result, are not subject to federal estate tax at your deatheven though you retain control over the plan, the investments chosen, and how and when funds are distributed. The contributions are considered gifts for federal gift tax purposes and are eligible for the annual gift tax exclusion (in 2006, $12,000). A special federal gift-tax provision allows you to use five years’ worth of annual exclusions, or $60,000 in 2006, at one time. Three points to consider: Taking maximum advantage of this special exclusion precludes additional annual exclusion gifts to the beneficiary for the year of the contribution and the next four years. And should you die anytime during that five-year period, a prorated amount will come back into your estate. Finally, contributions made in excess of the annual gift tax exclusion amount use up a portion of your lifetime gift tax exclusion (currently, $1 million).
