College education planning is a huge part of estate planning, and doing it in the right way can help you save money in the long run. A gift that the federal government has given everyone is the 529 Account, which allows you to make annual exclusion gifts ($15,000 in 2018) to a special account established for your child's education. In addition, the money contributed grows income tax deferred, and is generally not included in your estate for estate tax purposes.
One of the key aspects of planning for college, however, isn't the available tax techniques but rather the management of your finances. If you're heavily in debt or don't have the money available to put away for your child's education, a 529 Account is pointless. After all, you have to take care of your families basic needs before planning for future ones.
That being said, if you and your family have additional resources, placing them into a 529 Account can be a huge benefit to your children. The money that you put into a 529 Account, if you invest it wisely while the child is still young, can grow over time, so that when you do eventually need to pull money out, it may be substantially greater than what you put in.
On the gift tax, income tax, and estate tax side, a 529 Account makes a great deal of sense as well.
First, because you are making an annual exclusion gift, there is no gift tax that is due on your contribution.
Second, because the account grows with income tax deferred, there is no income tax to pay on the growth of the account.
Finally, the amounts you contribute aren't considered part of your estate for estate tax purposes, so they will not be counted when determining whether any estate tax is due.
Although 529 Accounts have a great number of benefits, there are some things to be aware of.
First, if you elect to contribute 5 years worth of annual exclusion gifts to a 529 account in a single year (a special feature that's available for these types of accounts) and you die prior to the 5 year period, a proportion of your contribution will be included in your estate tax for estate tax purposes.
Second, while withdrawals for qualified educational expenses are completely tax free, non-qualified distributions are subject to a 10% penalty on the account's earnings as well as taxation at the recipient's income tax rate.
For many, the benefits of a 529 Account far outweigh the risks, and are a very useful way to help families afford the high cost of college education.