Doubling down on 529 tax breaks

Investing in 529 college savings plans — even using some non-traditional funding tools — can help prepare clients for the expected increase in taxes after 2013, said R. Sheff Faulkner, a 529 specialist with BlackRock Inc. "For the past two decades we've had historically low tax rates," Mr. Faulkner told advisers at the annual meeting of the National Association of Personal Financial Advisors. Taxes likely will increase as the extended Bush tax cuts expire in 2013 and the Congress and President Barack Obama wrangle with the burgeoning federal deficit. "Those in the upper incomes are most vulnerable" to increases, he said. For clients willing to support the education of future generations, 529 plans allow savings to grow tax-deferred and distributions that are used for qualified education expenses are tax free at the federal level. Some states also offer beneficial tax treatment for the plans. Advisers can help clients reap even more tax benefits with some strategic solutions for how they fund the plans, Mr. Faulkner told attendees at for three-day conference in Salt Lake City. Transferring the value of assets in UGMAs or UTMAs into a 529 plan would allow clients to pay the capital gains on the accounts' earnings now, when tax rates are low, Mr. Faulker said. Such a move will require that investments in the existing accounts be liquidated and the beneficiaries of the accounts can not be changed, he said. Also, a trust can be used to fund 529 plans. This would be a good option for a trust to draw down assets if it is throwing off more than $11,150 in income, a threshold that prompts trusts to be taxed, Mr. Faulkner said. A third funding option is to use the lifetime gift tax exclusion to fund 529 plans for multiple grandchildren, he said. That exclusion is $5 million through 2012, according to the estate tax agreement hammered out in December.