With trust funds, try the 529
Dear Mr. Priest: My wife and I have a 6-year-old son. Prior to my father’s death, he set up an irrevocable trust for the benefit of our son to be used for college. It’s currently worth nearly $100,000 and consists of mostly mutual funds and some stocks. Right now the account is taxed every year. Where’s the best place to put it to save money on taxes? – Kenneth,
Dear Kenneth: Thanks to the recent tax reform act, you may be able to use your son’s trust to fund a 529 College Savings Plan. I will assume that you are the sole trustee of the account and can make investment decisions on behalf of your son. If you are not the sole trustee, the trust may have to be revised prior to taking action because a 529 plan can only have one account owner. Additionally, a 529 plan can be funded only with cash, therefore any appreciated securities would have to be liquidated first. This may trigger possible capital gains to be reportable on your child’s tax return.
Also, since the original account was irrevocable, any withdrawals from the account must be for the benefit of that child only whereas normally the beneficiary on a 529 plan can be changed. With this in mind, a 529 plan can still provide wonderful tax benefits if it is used for your son’s college education. The most notable benefit is that the entire account has the potential of tax-free growth and withdrawals. For example, if your child’s $100,000 account grew at 10 percent annually until he reached 18, the total account value would be more than $300,000. This may translate to more than $200,000 tax free.
Currently, the laws allow for a single contribution of $55,000 to a 529 plan without triggering gift taxes. In this case, the owner would have to wait five years before contributing more to the account. However, since in your case the money has already been contributed to your son’s trust account, it may be possible for you to immediately utilize the entire $100,000 account to fund a 529 plan.
The maximum amount that can currently be contributed to a 529 plan is $232,000 and you are well within those limits. If your child’s trust was established as a formal written trust (as opposed to a UGMA or UTMA), the terms and conditions of the trust would still be in effect within the 529 plan. Therefore, not only would the trust potentially act as it currently does, but potentially could enjoy the tax benefits associated with a 529 plan.
Dear Mr. Priest: Has the annual gifting amount increased for 2002? – Dan, Breckenridge
Dear Dan: Actually it has. In 2001 the gift tax exclusion was $10,000 per year. This means that any person could give to any other person up to $10,000 without triggering gift taxes. Once again, it’s the donor (person giving the gift) that is responsible for paying gift taxes. If there was no limit, then someone on their death bed could give an entire estate away and not have to pay estate taxes upon their death. Wishful thinking. The maximum gift tax exclusion has increased to $11,000 in 2002.
Bob Priest, MBA, CFP, is an Independent Certified Financial Planner and Registered Investment Advisor serving Summit, Eagle and Front Range residents. He can be reached at (970) 513-7077 or visit his Web site at http://www.BobPriestFinancial.com. Bob Priest, Registered Principal offering securities through SunAmerica Securities, Inc., member NASD/SIPC. Submit your financial questions to Bob@FinancialCompanies.com.
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