Making gifts to children and grandchildren to fund their education are often times implemented through the use of Section 529 Plans. This is an excellent way to accomplish this funding goal. However, donors must consider the following gift tax and gift tax return implications involved when making these gifts.
Gifts to these 529 Plans qualify for the annual donee exclusion, regardless of the fact that gifts to these plans are transfers of a future interest. Generally, a gift needs to be a present interest gift to qualify for the annual exclusion but gifts to Section 529 plans are an exception to this general rule.
Currently, in 2020, the annual donee exclusion is $15,000. This amount is indexed for inflation and may increase in future years.
In addition, gifts to Section 529 Plans qualify as nontaxable gifts for GST tax purposes regardless of the fact that gifts to these plans are transfers of a future interest.
A transfer of amounts up to the annual exclusion amount would not require a donor to file a Form 709 gift tax return.
A donor may want to take advantage of the right to spread the gift over 5 years so that 1/5 of the gift is treated as made in the year of contribution to the plan and 1/5 is treated as made in the next four years.
This election is applicable only for gifts not in excess of 5 times the annual exclusion amount for the year of contribution. So if the annual exclusion in the year of gift is $15,000, this election is available only if the gift does not exceed $75,000. As a result, the donor can front load a gift in the amount of $75,000 per donee.
If this 5 year election is made the donor must file a Form 709 for the year of the gift and check line B of Schedule A and attach various details to the Form 709 ( total amount contributed per individual, amount for which election is made, and name of the individual for whom the contribution is made.)
For each of the 5 years, the donor must report 1/5 of the amount. However, there is a special filing rule where during the 5 year period, if the donor does not make any other gifts during the year, the donor need not file the Form 709. So if a one time gift of $75,000 is made and no further gifts are made in the following four years, a gift tax return is required only in the initial year of the gift.
Where a donor makes gifts in excess of the annual donee exclusion of $15,000, a spouse can join in such gift to allow for an additional exclusion of $15,000. In addition, the donor can use his or her then available lifetime exclusion of $10,580,000 (current amount in 2020 that is indexed for inflation) to offset such gift. With these additional strategies, there should be very little gift tax, if any, where large gifts are made to Section 529 educational plans.
Steve Fromm was extremely helpful to my wife and myself in preparing the legal documents for our estate planning as well as responding to our federal and state income tax inquires. He was a very good listener as to our needs and structured his replies in everyday language that my wife and I could understand. He asked thought provoking questions and made recommendations to enhance our goals.