529 Plans: Planning for Education with a Tax and Asset Protection Bonus

A 529 plan, otherwise known as a qualified tuition plan, is a tax-sheltered way of saving for education expenses. 529 plans are sponsored by states, state agencies, or educational institutions.

A contribution to a 529 plan is not federally income tax-deductible, though it may qualify for a state income tax deduction in some states. Assets in the plan may be invested in various ways, depending upon the particular plan. Income earned in the 529 plan is not taxed currently. In fact, it may never be taxed, depending upon how it is distributed.

Distributions from the 529 plan, if used for the beneficiary’s qualified education expenses, including tuition, books, and other education-related expenses for students at colleges, junior colleges, technical schools, and even at primary and secondary schools (up to $10,000 per year) are income tax-free.

If the distributions aren’t used for qualified education expenses, the earnings would be taxable and may even be subject to a 10% penalty.

Contributions to a 529 plan may qualify for the gift tax annual exclusion (currently $15,000 per year per person). In fact, an individual may utilize up to 5 years of annual exclusions up front. If the donor dies within 5 years, the value of the annual exclusions for the years into which the donor did not survive would be brought back into the donor’s taxable estate. However, any growth on the funds would be out of the donor’s taxable estate.

Typically, if a donor retains control over assets, those assets are included in the donor’s taxable estate. Uniquely, the donor of the 529 plan can keep control of the plan during their life as the owner of the plan and yet the assets in the plan are still removed from the taxable estate. The account owner can change the identity of the beneficiary. So, if you select a successor owner, they could direct the funds away from the beneficiary.

If you want to lock down the 529 plan to make sure your successor doesn’t redirect the funds for themselves or beneficiaries whom they prefer, you could use a trust to hold the 529 plan. However, if you do that, you would be limited to one annual exclusion at a time.

An added bonus of 529 plans is they may even be exempt in bankruptcy, as long as the funds were contributed at least two years before the donor’s bankruptcy filing, the 529 plan is established for the donor’s children, grandchildren, step-children, or step-grandchildren, and contributions don’t exceed the 529 plan’s maximum contribution limit per beneficiary (which can be in excess of $500,000).

Thus, uniquely, a donor can keep complete control over 529 plan contributions, they may be completed gifts for gift and estate tax purposes, and they may be protected in bankruptcy.

10 Worst States for Retirement

The ranking listed the following states:

10. Alabama

Alabama ranked poorly because of low life expectancy and high crime. Alabama does not have a state estate tax.

9. Michigan

Michigan ranked poorly due to economic factors, crime, and many other reasons.

8. (tie) New York

New York ranked poorly due to high income and property taxes and a high cost of living, as well as harsh winters. The fact that New York’s separate state estate tax is phasing out may help in future rankings.

7. (tie) Maryland

Maryland, too, ranks poorly due to a high cost of living and higher than normal taxation. As with New York, the fact that Maryland’s separate state estate tax is phasing out may help in future rankings.

6. (tie) Georgia

Georgia ranks poorly in most categories besides weather. It should be noted that Georgia does not have a state estate tax.

5. Nevada

Nevada made this list due to a high crime rate and low life expectancies. The state has neither a state income tax nor a state estate tax.

4. Illinois

High property taxes contributed to Illinois’ appearance on this list. Illinois does have a separate state estate tax.

3. Tennessee

Tennessee ranks poorly due to high crime and low life expectancy. Tennessee has no tax on income except dividends and interest.

2. Louisiana

Louisiana ranks poorly due to high crime and low life expectancy.

1. Alaska

Alaska is ranked as the worst state for retirement due to harsh winters and its high cost of living. Alaska has no state income tax and no separate estate tax.

This listing in USA Today, based on a survey by MoneyRates, demonstrates that taxes are only a small part of the equation. Three of the five worst states for retirement have no state income tax, Alaska, Nevada, and Tennessee (except dividend and interest income tax). Many of the 10 worst states have no state estate tax. This list demonstrates that taxation is not the primary consideration for most people.

10 Best States for Retirement

Last week, I wrote about the 10 Worst States for Retirement, based on a piece in USA Today. This week, let’s look at the 10 Best Places for Retirement in 2014, according to Bankrate.com.

The ranking lists the following states:

10. Virginia

Virginia ranked well because it had relatively low taxes, cost of living, and crime and a moderate climate.

9. Iowa

Iowa ranked well because of exceptional health care and low costs.

8. Idaho

Idaho ranked well because of a low cost of living, low crime, and plenty of sunshine.

7. Montana

Montana fared well because of abundant sunshine, good health care, low taxes, and low crime.

6. Nebraska

Nebraska ranked well because of low costs, low crime, good health care, and abundant sunshine.

5. Wyoming

Wyoming broke into the top five due to the lowest taxes in the country (according to Tax Foundation and considering taxes at all levels), low crime, and lots of sunshine.

4. North Dakota

North Dakota made the number four spot due to low cost of living, low crime, low taxes, good health care, and making the top of Gallup-Healthways’ Well-Being Index (which is a comprehensive measure of happiness).

3. Utah

Utah ranked well in every measure, including the Well-Being Index.

2. Colorado

Colorado took the penultimate spot with low costs, low crime, good health care, low taxes, and good performance on the Well-Being Index.

1. South Dakota

The top spot went to South Dakota which did exceptionally well in almost every category, including good health care, good performance on the Well-Being Index, extremely low taxes, low cost of living, and low crime.

The Bankrate.com listing, like the listing in USA Today, demonstrates that taxes are only part of the equation. Surprisingly, colder climates seem to predominate and the southern tier of states, from California to Florida, did not make the list at all.

4 Important Documents For Estate Planning

Although estate planning may not be the top priority on your daily to-do list, it’s something that should be addressed before it’s too late. Completing the process ensures your wishes are fulfilled and your family is taken care of upon your death. It also keeps you covered if you’re still alive but become disabled or incapacitated. Here are four documents you will need.

1.  Trust

The last thing you want to do is leave it up to the courts to determine who receives your assets. Accordingly, it’s critical that you have a Trust in order to specify who gets what and other details. You don’t want to create strife between two or more family members because of a lack of clarification. That’s why it’s usually best to tell individuals ahead of time of what will be passed on to them. You should also choose a successor trustee to be in charge of paying taxes, managing assets and distributing them to beneficiaries.

2.  Durable Power of Attorney

In the event that you’re unable to make your own decisions while still living, you will want a person who you trust to make your decisions for you. You will give this individual the authority to act on your behalf to cover financial and legal transactions. Because this person will have a lot of power in their hands, it’s important to think carefully before choosing a durable power of attorney. This person should not only have your best interest in mind but should be financially responsible and capable of effectively managing money. Having a backup in place is a good idea in case something happens to your initial power of attorney.

3.  Medical Power of Attorney

This is a legal document that gives another person the ability to make your medical decisions for you if you’re unable to do so. They will act as your medical power of attorney and will essentially have your life in their hands. Consequently, making your choice isn’t something to take lightly. The person you choose should want only the best for your health and well being. They should also be able to remain calm during a stressful situation. Subsequently, objectivity is a good characteristic to look for.

4.  Living Will

Drafting a living will isn’t always a pleasant thing to do, but is nonetheless an important part of estate planning. In this document, you will specify what you want for end of life care and ensure that you remain relatively comfortable. For instance, if you develop a terminal illness that’s incurable, you could dictate what type of treatment you receive, if any. You could also determine whether or not you want artificial respiration to keep you alive. Having a talk with family and loved ones about your living will and medical power of attorney should make it easier in case of a difficult situation in the future.

Due to the emotional nature of estate planning, it’s sometimes put off. Even though death and medical issues aren’t something that we like to think about, much less put at the forefront of our minds, it’s better to take care of legalities in advance to make the process easier later on.

6 Myths People Tell Themselves About Advance Directive Accessibility

“Where’s That Advance Directive?” In the New York Times recently, Paula Span interviewed a hospital social worker about the unavailability of people’s advance directives at the hospital. She faces this problem at least once a week: patients—who have already signed advance directives—arrive at the hospital without them.

This social worker paints a picture of the fallout from not having the documents in a timely manner: delay of medical treatment, a near-miss in having the wrong person make health care decisions for the patient, and more. Frustrated, she concludes with the obvious: we waste our hard work making these decisions and having the difficult conversations with our loved ones if the documents aren’t there when it counts.

Taking up where Ms. Span left off, here are six of the most common myths people rely on when they assume that their advance directives will be available at the hospital—and why they are mistaken.

  1. “My family has a copy and will remember to bring it to the hospital.” Well, it’s unlikely. In an emergency, the last thing on your loved one’s mind is your paperwork. In a time of crisis, your most capable loved ones will remain calm and focus their energy on you. Others may simply panic. An estate planning attorney admitted to me that, in the midst of his father’s heart attack, he didn’t think to get his dad’s advance directive before they left the house. “If I can’t remember to do this,” he observed, “how could I possibly expect my clients to remember?”
  2. “If I forget it, my family can just go home for it.” Maybe—but at potentially great cost. Your loved one may have to leave you alone in the hospital when you are at your most vulnerable. Andgoing home to get it can hold up your treatment. On the flip side, in cases of serious trauma, there may not be enough time to get it. Emergency medicine physicians talk about the “golden hour,” essentially the first 60 minutes during which vital decisions may need to be made about your care. You could run the risk of your wishes not being honored if they are not known right away.
  3. “My family knows where I keep it and will be able to find it.” Aside from the very neatest among us, does this one need a lot of debunking?
  4. “My hospital has it already.” Irrelevant. This may be surprising, but don’t expect your hospital to look for your advance directive just because you gave it to them previously. (It would take too much time for them to go dig it out of your old chart from a prior hospital admission or episode.)  Even with an electronic medical record, an advance directive can be hard to find, because some of these systems don’t have a designated place for it. And some hospitals may have multiple electronic medical record systems that don’t talk to each other.
  5.  “My advance directive is on a USB key (thumb drive) that I keep with me.” Useless. A hospital worth its salt in patient confidentiality and virus protection is not going to plug your thumb drive into its computer system.
  6. “My doctor and my lawyer have copies if I need a backup.” Don’t rely on either of theseas yourprimary emergency backup. They can help you Monday–Friday during business hours, but are their offices open at 2 am? On Sunday? Doctors’ and lawyers’ offices are only open about 20% of the time in a whole week.