Parents or grandparents who are concerned about funding college tuition for their children or grandchildren might welcome the opportunity to invest in a Section 529 Plan, also known as a Qualified Tuition Program. There are two types of Section 529 Plans, prepaid tuition plans and college savings plans.
Both plans are named after Section 529 of the Internal Revenue Code, which lists the requirements for the plans to be free from federal income taxes. Prepaid tuition plans allow the individual to lock in future tuition rates at in-state public colleges at current prices and are usually guaranteed by the state. College savings plans are more flexible, but do not offer the same guarantee.
In terms of contributions to the plan, anyone, including relatives, friends, colleagues and acquaintances can deposit money on behalf of a beneficiary. According to both types of plans, the account owner controls access to funds and is treated as the legal owner of the account.
If the beneficiary does not end up attending college, the account owner can get his or her money back or change the beneficiary to another family member. In addition, both types of plans offer tax-deferred growth and tax-free withdrawals if the funds are used for higher education expenses.
Recent changes in the tax law have made investing in Section 529 Plans even more appealing. In May of 2007, legislation was passed extending the kiddie tax to those who are 18-years-old or who are full-time students under the age of 24 years. The expanded kiddie tax rules go into effect January 1, 2008 and apply only to children who have income on investments and whose earned income does not exceed one-half the amount of their support.
Many parents of college aged dependents who had hoped to shift unearned income to children in lower tax brackets through UTMA or UGMA accounts and use such funds to pay for higher education costs, will be negatively affected by the legislation. Annual income over $1,700 that is generated in these accounts will now be taxed at the parent’s highest marginal tax bracket. This tax change effectively makes custodial accounts a less attractive way for people to save for college education. Because funds within a Section 529 Plan grow tax-free, investing in them may be more attractive to parents and grandparents.
Nonetheless, in the context of Medicaid planning, funds in a 529 account are treated as countable assets of the account holder. A parent or grandparent, who has planned for a child’s education, might find himself/herself ineligible for Medicaid because of the ownership of this account.
For anyone who has these concerns, it would be important to relinquish control of the account or transfer the ownership of the account to a Medicaid Irrevocable Trust. The relinquishment of control or the transfer of ownership would be subject to a five-year look back period for Medicaid nursing home eligibility purposes, but at least the five-year clock will start ticking.
While contributing to a Section 529 Plan and establishing Medicaid eligibility are not relevant to everyone, knowledge of these rules is certainly important when it comes to planning for all generations.
Ronald A. Fatoullah, Esq., CELA is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts and wills. The firm has offices in Great Neck, Forest Hills and Brooklyn, NY. Mr. Fatoullah has been named a “fellow” of the National Academy of Elder Law Attorneys and is a former member of its Board of Directors. He also serves on the Executive Committee of the Elder Law Section of the New York State Bar Association. Fatoullah chairs the Legal Committee of the Alzheimer’s Association, LI Chapter and serves on its Board of Directors. He is also a co-founder of the Senior Umbrella Network of Queens, and currently serves on its Board of Directors. This article was written with the assistance of Debby Rosenfeld, Esq., a senior staff attorney at the firm. The firm can be reached by calling 718-261-1700, 516-466-4422 or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.
*Certified as an elder law attorney by the National Elder Law Foundation.