529 plans are a highly common method of reducing taxes at both the state and federal levels. However, Maryland residents who are thinking of utilizing this helpful estate planning option should bear in mind that grantors are not allowed to make any alterations to a trust’s beneficiaries. This and other important rules to remember about 529 plans are discussed below.
In many situations, this lack of direct control from the grantor leads to issues, such as changing circumstances when a beneficiary needs to be switched. One example is when a trust is created for a child who has now grown up and is no longer in need of funds from the trust. Other times, grantors need the funds for their own personal use.
Add flexibility to your irrevocable trust
Grantors are given more freedom with their irrevocable trusts through powers of appointment. These may be granted to the beneficiaries, or a trust protector may be appointed by the grantor.
However, the grantor is prohibited from holding these powers personally. It’s this lack of control that prevents many people from utilizing irrevocable trusts, even when they might be to their benefit.
Ensuring that grantors have fully relinquished control over the gifted assets is essential to avoid causing estate tax inclusion by mistake. The single exception to this estate tax planning rule is the 529 plan.
The Internal Revenue Code states that no amount in an individual’s gross estate can be included because of an interest in a qualified tuition program. This estate planning exception in itself has exceptions.
In many cases, a 529 plan may be included in a beneficiary’s estate in the event that the beneficiary passes away. Other times, a grantor will decide to “front-load” five years’ worth of yearly exclusion gifts to the 529 plan but passes away before that period is up. When that happens, part of the amount that’s been gifted becomes includible in the estate of the grantor.