by Philip Wyre

Created on: November 04, 2009

The federal government imposes a tax on all gifts given to an individual of over $13,000.00 a year (as of 2009). This tax level can be pooled by heterosexual partners, so you may gift $26,000.00 a year to an individual before any gift tax is paid. One of the reasons this git tax is imposed is to avoid giving assets away to avoid paying Estate Tax. This limit can be restraining if you are looking to avoid paying Estate Tax whilst providing for younger family members and there is a way of increasing your tax free allowance by using a 529 College saving plan.

Many Grandparent's are advised by their accountant or financial advisor to utilise their Gift allowance to avoid paying Estate Tax. Although this can be beneficial, some may be worried about irrevocably parting with your assets and if you don't use your gift allowance for a year, it disappears. This presents a problem which can be solved by utilising a 529 saving plan.

If you are contributing to a 529 plan and you go over your $13,000.00 gift tax limit a year, you may apply to spread your contribution over a 5 year period. Your contribution to the beneficiary for the year will therefore be spread over 5 years, being 20% of the contribution per year. This means the limit is effectively $65,000.00 or $130,000.00 for a couple contributing, as long as no other gifts are given to the beneficiary in the 5 year period. This is an extremely effective way to avoid paying gift tax to a person who is looking to go to college.

If the beneficiary of the 529 plan decides not to go to college, you will not lose the benefits of your plan either. You may change the beneficiary to another member of the family, this could be a sibling of the current beneficiary, but you are also able to move the plan up or down the family tree, for example, you could move it to the beneficiary's child or parent. The beneficiary can be changed an unlimited amount of times without any penalty, so it is possible to have the 529 plan passed from generation to generation, meaning the funds will be there when someone needs to fund a college education when it is right for them. It is important to ensure that any 529 plan does not have a time limit on how long the account may remain open, many plans on the market do not have one.

Another unique feature with ta 529 plan is that the value saved in the 529 plan are removed from your taxable estate, but you still have access to the money. Any money removed from the saving plan will be subject to tax and you may have to pay a penalty. However, if you desperately need to access the money, it is still there for you to get at.

The 529 plan is therefore an extremely flexible product. Not only does it increase the amount you can git a relative in a tax year by 5 times, the funds you put in aren't locked away from you. This allows you the flexibility in case of any unforeseen events that you may need the money for.

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