Give and Receive with Accelerated 529 Gifting

By Evan Mayhew - June 6, 2018

Beyond the tax-advantages  afforded by 529 plans, gifting money for college may help fulfill a child's dreams for the future. An accelerated gift may also reduce the benefactor's estate taxes. This can add up to good news for college-bound recipients and gift givers alike.

Accelerated gifting, sometimes called "frontloading" a 529, is possible due to a special 529 tax rule. It allows parents, grandparents or anyone to fast-track a sizeable gift to a future student and spread the tax treatment over five years.

Accelerated Gifts, Not Accelerated Taxes

For any year, 529 gifts can be given up to a certain amount without triggering federal gift taxes . The accelerated tax provision allows for five times the annual limits, also without prompting gift taxes.

2018 Federal Gift Tax Exclusion

* Accelerated gifting: Elect to treat the gift as if it were made evenly over a five-year period

In addition, 529s do not have income limits. Investors at any income level can open and contribute to an account.

More for College; Lower Estate Taxes

For a 529 beneficiary, an accelerated gift allows more money the potential to compound and grow tax-deferred for education expenses. The larger one-time amount may add up to more than annual contributions over the same number of years.

An Accelerated Gift May Add Up to More for College

Source: Time Value Calculator, Financial Calculators from Dinkytown.net, 2018.

The hypothetical example compares a one-time investment of $75,000 held for 18 years to 18 equal annual investments that total $75,000. The results assume a 6% interest rate.

This hypothetical situation contains assumptions that are intended for illustrative purposes only and are not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities.

529 gift givers benefit because the accelerated gift amount reduces their taxable estate value. But that's not all. Transferring wealth in the form of a 529 gift can provide greater potential for those who have more than one student needing college funds. There is no limit to how many students for whom a gift giver can bestow an accelerated gift. Each gift has the same estate tax-reducing benefit, as illustrated below.

Considerations for Investors

Financial professionals can help investors decide if accelerated gifting is the right path for their student and their estate plan. Here are some discussion points when deciding. Other 529 contribution rules  should also be considered.

A Quick Path to Lower Estate Value

The accelerated gift amount exits your estate immediately instead of over five years. However, you should also consider other gifts you might make to the beneficiary during the same five years and potential gift tax implications if you exceed annual limits.

Five Years Is the Only Option

Accelerated gifts are pro-rated over five years at 20 percent each. Investors cannot spread the gift over fewer, or more, years. Additionally, the entire gift must fall under the tax treatment. For example, if you gift $75,000, you cannot choose to have $55,000 subject to the five-year treatment and $20,000 not.

Shrinking the Estate, but Not Losing Control

You retain control of the assets. For 529s, the account holder controls the assets and can revoke a gift if circumstances warrant. In doing so, however, the value of the gift returns to the estate.

Not Outliving the Five Years

If you don't live through all five years, the remaining contributions return to your estate. For example, if you pass away in year three, the last two years of contributions would be returned.

Financial Aid Impacts

Large 529 gifts may affect student financial aid packages, but it depends on who owns the account (parents, student or grandparents). This fact should be part of the decision-making process.

An Enduring Gift

An accelerated 529 gift benefits both the student and the gift giver. Beyond the extra college funds potential, the greatest value is helping a student dream big and achieve his or her goals through higher education. The added benefit for estate planning is the bow on the package.