529 Plans For Estate Planning In Oklahoma: Everything You Need To Know

For family members who want to save up for a child’s education, a 529 plan—otherwise known as a qualified tuition plan (QTP)—can be a great option. Opening a 529 plan can not only help secure a child’s future education, but can be a valuable estate planning and retirement tool. In this article, we’ll give an overview of the plan and lesser-known benefits of 529s for estate planning.

What Is a 529 Plan?

A 529 plan is a tax-advantaged savings plan primarily designed to encourage saving for future education costs. These plans are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

There are two types of 529 plans: prepaid tuition plans and education savings plans.

• Prepaid tuition plans allow you to purchase credits at participating colleges and universities for future tuition at current prices for the beneficiary.
• Education savings plans operate by investing your contributions in mutual funds or similar investments. The account will go up or down in value based on the performance of the chosen investments.

Withdrawals from either of these plans can generally be used at any college or university (and sometimes at non-U.S. institutions). Plus, the 2017 Tax Cuts and Jobs Act expanded the definition of "qualified education expenses," increasing the plan's flexibility. Now you can withdraw up to $10,000 a year to use for elementary or secondary (K-12) public, private, or religious schools.

While each state sponsors a 529 plan, you're not limited to Oklahoma’s plan. In other words, consumers have a variety of options and typically purchase an in-state or out-of-state plan based on the most favorable tax breaks. Each plan can vary in investment options, enrollment and management fees, and contribution caps, so those elements must be taken into consideration as well.

Using a 529 Plan for Estate Planning

A 529 plan can be an effective tool for estate planning. The primary reason to use 529 plans for estate planning is that earnings accumulate on a tax-deferred basis and distributions are tax-free if used to pay for qualified educational expenses. Also, these plans:

• Are more simpler, easier, and more affordable to set up than trusts
• Have generous and flexible contribution limits
• Do not have income, age, or time limits
• Allow account owners to retain control
• Allow account owners to change the beneficiary at any time

529 Plan Contributions

Contributions to a 529 plan are considered gifts for tax purposes. In 2024, individuals can make an annual tax-free gift of up to $18,000 to a 529 plan for each beneficiary without triggering any gift tax or using any of their lifetime estate and gift tax exemption amounts. Plus, there is an option to front-load five years’ worth of gifts (also called superfunding), meaning you could make a one-time $90,000 contribution (or $190,000 for married couples who elect to split gifts) per beneficiary, which can significantly reduce the size of their estate.

Why Use a 529 Plan for Estate Planning?

To summarize the above, here are the reasons why you should consider using a 529 for estate planning:

• Tax Advantages: The primary benefit of using a 529 plan for estate planning is the tax advantage it offers. Contributions grow tax-deferred, and withdrawals are tax-free at the federal level if used for qualified education expenses, such as tuition, mandatory fees, books, supplies, and room and board.

For example, Individual taxpayers may deduct up to $10,000 in Oklahoma 529 contributions each year from their adjusted gross income, and taxpayers filing jointly may deduct up to $20,000. Also, investment earnings are 100% tax-free in Oklahoma when used for qualified education expenses.

• Control Over Assets: Contributors retain control over the assets in a 529 plan. This means that if the designated beneficiary does not need the funds for college, the account owner can change the beneficiary to another family member without tax consequences.
• Gift Tax Benefits: As mentioned, contributions qualify for the annual gift tax exclusion, and one can make a lump-sum contribution every five years per beneficiary, which can be a strategic way to quickly decrease the size of one's taxable estate.

Who Gets Taxed on a 529 Plan?

If managed correctly, no one will get taxed on a 529 plan. While contributions are not deductible on federal tax returns, earnings grow free of federal tax, and withdrawals are exempt from federal income tax when used for qualified education expenses.

If withdrawals are not used for these expenses, they are subject to tax and a 10% penalty on the earnings portion of the withdrawal. The tax and penalty are typically paid by the account owner, who is usually the contributor.

Oklahoma Inheritance Taxes on 529s

Oklahoma, like many states, does not levy an inheritance tax. This means that there are no state inheritance taxes imposed on the assets in a 529 plan passed on to a beneficiary after the account owner’s death. However, it’s crucial to consider the federal estate tax implications if the account owner’s estate is large enough to trigger these taxes.

Reducing or Avoiding Taxes on 529s

While we always advise that you speak with an accountant or experienced estate planning attorney regarding tax implications on assets and investments, there are some basic strategies you can employ to minimize or avoid taxes on a 529 plan:

• Use the Money for Qualified Education Expenses Only: Ensure that all withdrawals from the 529 plan are used for qualified education expenses to benefit from tax-free withdrawals.
• Don’t Be Afraid to Change Beneficiaries: If the original beneficiary does not need the funds, change the beneficiary to another family member who can use them for educational purposes to avoid the taxes and penalty on a non-qualified withdrawal.
• Time Your Contributions: Making contributions during years when one's income is lower may provide additional tax benefits.
• Avoid Non-Qualified Withdrawals: Non-qualified withdrawals not only incur taxes but also a 10% penalty. Planning the amount contributed and ensuring it aligns with anticipated educational expenses can minimize the risk of non-qualified withdrawals.

By leveraging these strategies, individuals can maximize the benefits of 529 plans as estate planning tools, as well as educational funding mechanisms. Contact our firm today to learn more about how to create an estate plan that secures educational opportunities and the assets you’ve earned for your family.