Are there any estate tax benefits associated with 529 plans?

Yes! Money invested in a 529 plan is considered to be outside of your estate, even though the money is under your control. Anyone who wishes to reduce their estate tax through gifting, but does not want to irrevocably give away their assets, should consider this strategy.

Do you have any general advice for parents and guardians who are considering out-of-state 529 plans?

A distinction again needs to be made between prepaid plans and savings plans. Only residents may invest in their home state prepaid tuition plan. However, college savings plans are typically open to residents and non-residents. Withdrawals from any plan may be used at any college in the country. This presents an opportunity to seek out plans with better performance track records, more attractive mutual fund options, lower fees and/or certain other features that may be more attractive.

While comparing all of the relevant features, you would want to determine if your home state offers a state tax deduction for investing in its savings plan. If you are not entirely satisfied with your home state plan, one strategy would be to invest in two savings plans. In your home state, invest up to the amount allowed as a deduction and in the out-of-state plan, all of the remaining dollars.

Do you have any comments on the recent NASD 529 investigations and/or the rather large disparities between fund expenses for many of these college savings plans?

I personally welcome the NASD and SEC investigations into savings plan fees. I believe  investors should know what 529 plans cost and I am in favor of making the fees more transparent to consumers.

Having said that, according to studies performed by savingforcollege.com, the tax advantages of 529 savings plans far outweigh the additional fees incurred. Also, keep in mind that if you are working with a 529 advisor, you may ultimately pay higher fees than if you do all of the work yourself.

How can our readers determine which plans are best for them?

Unfortunately, there is not a pat answer to this question. Everyone’s situation is different and unique. That’s why I would recommend that they consult with a professional who specializes in 529 plans to answer this question. A qualified advisor can determine which plan features are most important to them and then make a specific recommendation that will satisfy their needs and help achieve their goals.

Howard, thank you again for all of your time and advice. We are confident many of our readers will find this to be very helpful!

Howard Gartenhaus, CFS can be reached directly: toll-free telephone 877-866-8800, or email hsg@gartenhaus.com.

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