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We interrupt this program to bring you a special announcement! Section 529 Plans - College Savings
Programs - have been incredible vehicles for financing college educations and were the subject of a prior
newsletter. The 2001 Tax Bill has made the incredible unbelievable (if that is not being redundant)!
NEW DEVELOPMENT
What is this unbelievable new development? It is the provision in the new tax bill that makes qualified
withdrawals from Section 529 plans free of income tax! We and others have been touting the benefits of these
tax-deferred savings programs noting the income-tax-free buildup within the plan, similar to an IRA or 401k.
Now qualified withdrawals - for higher education expenses - are free of any income tax at all! The portion of
the withdrawal which constitutes appreciation or income is not taxed to the beneficiary nor to the owner of the
plan!
A UNIQUE ANIMAL
The old adage is that "if it walks like a duck and talks like a duck, it must be a duck." To reverse the spin, a
Section 529, state-sponsored higher-education savings plan, does not walk like a duck, or talk like a duck,
but the Internal Revenue Code and IRS recognize that yes, it is a duck.
The contributions to a Section 529 Plan are treated as a tax-free gift by the contributor, to the extent of $50,000,
using the $10,000 annual exclusion for five years.
The contributions are not part of the contributor’s taxable estate.
However the contributor, or an owner designated by the contributor, retains complete control over the account,
meaning that -
- The account owner can change the beneficiary to another member of the family.
- The account owner can roll over the plan from one state to another depending on investment
objectives, performance, etc.
- The account owner can determine the timing and amount of distributions.
- There is no limit on the amount of time that money can stay in the plan.
In other words, this special animal does not look like a normal gift, where the donee has possession or
control of the property, and the donor gives up control over the property.
WHAT’S THE HOOKER?
The only hookers in Section 529 - Higher Education Savings Programs - are:
Only cash can be contributed to the plan, no appreciated securities or other property.
There is a penalty for non-qualified withdrawals (withdrawals not used for higher education expenses). The
safe-harbor penalty is 10% of the earnings portion of the withdrawal. Michigan’s program is currently non-
competitive in that the penalty is 10% of the entire withdrawal. This may well be changed to make the
Michigan program more competitive with programs sponsored by other states.
There are limits on the amounts of money that can be contributed to a Plan for a particular beneficiary. In
Michigan no contributions can be made after the Plan account reaches $125,000. Other states have higher
amounts.
HOW’S THE MONEY INVESTED?
Each state’s Plan has an investment manager with certain investment options that can be selected. The
Michigan program is administered by TIAA-CREF. Several investment options can be selected, fixed income,
equities, or combinations thereof.
Plans sponsored by other states have different financial institutions as managers, with a variety of investment
options and a variety of fees and expenses charged to the Plan.
IS A STATE’S PLAN RESTRICTED TO ITS RESIDENTS?
Michigan’s Plan is open to anyone, not just Michigan residents. There are Michigan income tax advantages to
a contributor and a recipient for participating in the Michigan Plan. Those state income tax benefits and
relatively low expenses are two of the salient features of the Michigan program. Programs sponsored by other
states are also open to non-residents so Michigan residents can participate in state programs sponsored by
various investment firms. Michigan residents are not confined to participate in the Michigan Plan. Moreover,
Plans can be "rolled over" to other state programs to take advantage of different investment options, different
investment managers, and possibly different fee structures and withdrawal penalties.
WHERE DO I GET MORE INFORMATION?
The best place to get information, as with most anything else these days, is the Web. Go to www.
savingforcollege.com for a synopsis of all of the states’ programs. For Michigan information go to www.
misaves.com where you can download the application and the information booklet or order them by mail.
WHY DO WE CARE?
First and foremost many readers may have college expenses ahead of them.
On a broader scale, advisors need to appreciate the tax-saving potential for college savings, free of the
income tax burden and, in many cases, the estate planning potential for avoiding estate, gift and GST taxes,
as well as income taxes.
Financial consultants will be asked about these programs and should be familiar with programs offered by
various states. Other professionals will be asked their advice and should be in a position to provide informed
counsel.
CONCLUSION.
We had to break up our discussions on FLP - Family Limited Partnerships - to highlight the new
embellishment of these fantastic tax-favored plans - no income tax on withdrawals for higher education
expenses. This icing on the cake makes these Plans a must for families saving for college education and for
estate planners.
How long will Congress let these good times roll? Who knows? Congress has a history of reining in
programs that prove to be too beneficial. However in this area the pattern has been to grandfather plans and
balances in existence when a law is changed or a tax burden imposed. Therefore our advice is don’t pass the
candy store without buying. In a few years the Congress may close the store or cut back the inventory. Tax
savings under current law are too good to pass up.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| August 2001 SECTION 529 PLANS JUST GOT BETTER! by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |