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 do not consider the following gift tax and gift tax return implications involved when making these gifts.
Gifts To Section 529 Plans Qualify for the Annual Donee Exclusion
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 2014, the annual donee exclusion is $14,000. This amount is indexed for inflation and may increase in future years.
Gifts to Section 529 Plans Also Qualify as Nontaxable Gifts For Generation Skipping Transfer (GST) Tax
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.
Gifts to Section 529 Plans of the Annual Exclusion Amount Do Not Require the Filing of Form 709
A transfer of amounts up to the annual exclusion amount would not require a donor to file a Form 709 gift tax return.
Election To Spread Gift Over 5 Years: Front Loading of $70,000 Gift
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 $14,000, this election is available only if the gift does not exceed $65,000. As a result, the donor can front load a gift in the amount of $70,000 per donee.
Making 5 Year Election on Form 709
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 $70,000 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.
Section 529 Gifts In Excess of the Annual Exclusion Amount
Where a donor makes gifts in excess of the annual donee exclusion of $14,000, a spouse can join in such gift to allow for an additional exclusion of $14,000. In addition, the donor can use his or her then available lifetime exclusion of $5 million (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.
Hiring Steven was quite possibly the best decision of my life! Steven took the time to hear every single one of my concerns and address them in an extremely clear, concise and thorough manner. He guided me through the notoriously complicated and stressful process of probate with the utmost of compassion and dedication. Thank you Steven!
I highly recommend Steven J. Fromm for all your estate and tax planning needs. He has the most complete and thorough knowledge of current as well as pending federal, state, and local tax codes of any professional that I have ever been involved with. His ability to totally sort out your current financial condition and relate it to a plan to minimize your tax liability and allow you to sleep at night is without equal. He is professional, timely, creative, and an advocate for your needs, whether its personal or business. You can be assured that you will be well taken care of, with cutting edge/ sound financial and tax advice by Steven J. Fromm.
I have always found Steve to be very responsive, accurate and creative in legal matters presented to him. He demonstrates a good business sense. We have collaborated on several highly technical issues over the years. I look forward to our continuing relationship.
Steven has been instrumental in helping my partner and I to create a secure and satisfying estate plan, which meets or exceeds all of our wishes and contains contingencies for everything from medical issues to wealth management and living wills. In this process, Steven has also become a friend. If you need Estate Planning, Tax Advice, a Will or a trust, etc., we highly recommend Steven Fromm, Esquire. He will listen and be sensitive to your unique situation.
Steve is an excellent attorney who has provided help for my family personally for business, tax, and other services for many years. He is extremely knowledgeable and thorough, and is extremely good at explaining legal concepts to me in clear terms understandable to a non-attorney. It is difficult to pick only three attributes above, since Steve’s work meets most if not all of the attributes above.
Steve is an excellent corporate attorney who has a deep understanding of corporate law, taxes and estate planning. He’s been extremely helpful to me in keeping my many companies and business ventures organized, focused and squeaky clean. He’s very strong in estate planning and wealth preservation as well. Finally, his follow through is air tight and utterly dependable.
Steven is a trusted adviser. We depend on him for so many things. He is patient, listens to our needs and makes excellent suggestions. He is extremely talented. We value his advice and have recommended him unhesitatingly to friends and family.
Steve Fromm is a superb lawyer and I highly recommend him! After a terrible experience with a previous lawyer concerning an estate administration, I entered his office feeling very deflated, confused and discouraged. However, I left his office feeling enthusiastic and eager to get down to business. My situation was very unique, I needed his expertise for an array of things and Steve was able to address all of my needs. With a limited timeframe and an extreme amount of obstacles to overcome he worked meticulously, diligently and accomplished extraordinary results. His professionalism is incomparable and I am forever grateful.