0 2014 Legg Mason Investor Services, LLC, a Legg Mason, Inc.
subsidiary. Member FINRA, SIPC College Savings Plans: Estate &
Gift Tax Planning Date Presented by: Name Title
Slide 2
1 COLLEGE SAVINGS PLANS: ESTATE PLANNING 529 Plan Basics
Grandparent Benefits of 529 Plans Estate Tax Exemption Trust
Interaction with 529 Plans Important Resources Questions?
Agenda
Slide 3
2 COLLEGE SAVINGS PLANS: ESTATE PLANNING What is a 529 Plan?
Named after the federal tax code by which they are governed, 529
college savings plans are tax-favored, qualified tuition programs
administered by each state, for the purpose of helping families
save for college nationwide and, in many cases, overseas as
well.
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3 COLLEGE SAVINGS PLANS: ESTATE PLANNING Administered By
individual state Maintained By program managers (typically mutual
fund firms) Purchased Sold through advisors or directly purchased
by account owners (online or paper application) Investments Offers
the availability to invest in various investment options, typically
age-based and individual fund options on a tax-advantaged basis
Qualified Distributions Qualified educational expenses at any
higher educational institution which participates in the U.S.
Department of Educations Federal Student Financial Aid (FAFSA)
program 529 Plan Basics Overview Source: CollegeInvest, IRS
(http://www.irs.gov/pub/irs-pdf/p970.pdf), MSRB
(http://emma.msrb.org/EducationCenter/FAQs.aspx?topic=PlanBasics)
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4 COLLEGE SAVINGS PLANS: ESTATE PLANNING Account Owner: Must be
a U.S. resident & have a Social Security or federal tax ID
number No age or income restrictions on owner or beneficiary
Maintains full control of the account, including distributions
& investment choices A successor account owner may be named to
take over ownership of the account in the event of the account
owners death Beneficiary: Does not need to be living in the U.S. at
time of account opening, but must have a valid Social Security or
Federal Tax ID number May be changed to another member of the
family of the beneficiary at any time without penalty Accounts may
be held without a beneficiary in the case of scholarship accounts
with 501c(3) organizations as owners Who Can Participate?
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5 COLLEGE SAVINGS PLANS: ESTATE PLANNING Beneficiary Account
owners may change the beneficiary. No 10% penalty or adverse income
tax consequences if the new beneficiary is a member of the family
of the current beneficiary: Changing a Beneficiary Natural or
legally adopted children Parents or ancestors of parents Siblings
or stepsiblings Stepchildren Stepparents First cousins Nieces or
nephews Aunts or uncles The spouse of the original beneficiary or
the spouse of any of those listed above, excluding first cousins,
also qualifies as a family member. If the new beneficiary is not a
family member, the change is a non-qualified withdrawal, subject to
federal and state income tax (including possible recapture of state
deductions) on account earnings and may be subject to the 10%
federal penalty.
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6 COLLEGE SAVINGS PLANS: ESTATE PLANNING Key features of
combining the capabilities of estate planning with 529s Expand
ability to support high net worth clients Use special gift tax
exclusion: Leverage $14,000 annual gift tax exclusion 5-year
funding in one calendar year Maximize capabilities of trusts with
529s Reduce assets subject to $5.34 million per person estate and
gift tax lifetime exemption. Integrating Estate Planning with
529s
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7 COLLEGE SAVINGS PLANS: ESTATE PLANNING Direct Payments for
Tuition Unlimited direct payments to the educational institution
Issues: Mortality risk If donor dies before direct payment, the
assets are subject to estate tax Tuition only Not for books,
supplies, dorm fees, meal plan, computers or similar expenses
Financial aid impact Must be a student Gifting Without a 529
Source: IRS (http://www.irs.gov/pub/irs-pdf/p970.pdf;
http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleB-chap12-subchapA-sec2503.pdf)
IRS Publication US Code 2011 Title 26 Subtitle B Chapter 12
Subchapter A, Section 2503, page 2444);
http://www.gpo.gov/fdsys/pkg/CFR-2011-title34-vol3/pdf/CFR-2011-title34-vol3-sec673-5.pdf;
page 673.5 in section: 34 CFR 673.5(c)(1)(xiii));
http://thechoice.blogs.nytimes.com/2012/01/13/kantrowitz-answers-part-5/?_r=0;
http://www.fastweb.com/financial-aid/articles/3673-paying-the-college-directly-to-avoid-gift-taxes
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8 COLLEGE SAVINGS PLANS: ESTATE PLANNING Reduce Exposure to
Estate Tax Considered completed gifts, not subject to estate tax
and removes mortality risk Use for All Qualified Expenses Expands
usage of direct payment from tuition to other qualified expenses
(books, supplies, housing) Financial Aid Impact Assets dont impact,
but distributions increase expected family contribution in
financial aid calculation by up to 50% the following year
Grandparent Benefits of 529 Plans Source: IRS
(http://www.irs.gov/pub/irs-pdf/p970.pdf;
http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleB-chap12-subchapA-sec2503.pdf)
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9 COLLEGE SAVINGS PLANS: ESTATE PLANNING Retained Control
Ensure assets are spent on education as assets are revocable
Depending on family situations, changes in beneficiaries can be
made Unlimited Number of Beneficiaries No Expiration Date 529
assets are revocable and tax-advantaged Solution for Required
Minimum Distributions Clients who dont need their required minimum
distributions can reinvest those assets in 529 plans Gain State Tax
Deductions or Credits Grandparent Benefits of 529 Plans Source: IRS
(http://www.irs.gov/pub/irs-pdf/p970.pdf)
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10 COLLEGE SAVINGS PLANS: ESTATE PLANNING Implications for 529s
Certain states offer state income tax deductions for contributions
to 529 plans In Colorado, the accountholder receives a
dollar-for-dollar refundable deduction up to the residents taxable
income level. In Utah, the accountholder receives a 5% state income
tax credit up to $93 per beneficiary for single taxpayers. Amount
Increases to $186 for married couple, and increases each year.
Contributing to 529 plans may take the tax payment due down to
zero. Gain State Tax Deductions and Credits Source: IRS
(http://www.irs.gov/publications/p17/ch36.html#en_US_2012_publink1000174964)
UESP
(http://www.uesp.org/taxadvantages?gclid=CLj_5sC387kCFcqZ4AodHw4AEQ)
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11 COLLEGE SAVINGS PLANS: ESTATE PLANNING Estate Tax Planning
with 529s $5.34 million lifetime gift exemption from estate tax as
of 2014 for individual Estate tax rate for estates valued over
$5.34 million increased from 36% in 2012 to 41% in 2013 Exemption
indexed by inflation annually Two important goals combined
Potentially reduce estate tax burden with 529 plans Provide an
educational legacy Source: IRS (www.irs.gov/pub/irs-pdf/p950.pdf;
http://www.irs.gov/uac/Newsroom/Annual-Inflation-Adjustments-for-2013)
Slide 13
12 COLLEGE SAVINGS PLANS: ESTATE PLANNING 50-Year History of
Estate Tax Rates Sources: IRS
(http://www.irs.gov/uac/Newsroom/Annual-Inflation-Adjustments-for-2013),
IRS (http://www.irs.gov/pub/irs-soi/ninetyestate.pdf)
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13 COLLEGE SAVINGS PLANS: ESTATE PLANNING Potential gift/GST
tax consequences: A contribution to a 529 plan is a completed gift
from donor to beneficiary eligible for the $14,000 gift tax annual
exclusion When the beneficiary is two or more generations younger
than donor, the annual exclusion also applies to the
generation-skipping transfer (GST) tax No gift/GST tax
consequences: A change of the beneficiary to another member of the
family, or A transfer to an account for another member of the
family Exception: If the new beneficiary is one or more generations
below the old beneficiary, the value of the account at the time of
change/transfer is treated as a gift from old beneficiary to new
beneficiary. Gift & Generation-Skipping Taxes Source: IRS
(http://www.irs.gov/irm/part7/irm_07-025-044.html;
http://www.irs.gov/pub/irs-pdf/p950.pdf)
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14 COLLEGE SAVINGS PLANS: ESTATE PLANNING Federal Gift
Exclusions Gift Tax Exclusion: A parent may give up to $14,000 per
year without paying gift tax. The amount of $14,000 is as of 2014,
and may change over time. Gift Tax Exclusion Source: IRS
(http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/What%27s-New---Estate-and-Gift-Tax;
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes#2)
Slide 16
15 COLLEGE SAVINGS PLANS: ESTATE PLANNING Federal Gift
Exclusions Generation-Skipping Transfer Tax Exclusion: A
grandparent may make taxable gifts up to $5.34 million over the
course of his/her lifetime, including gifts to grandchildren and
great-grandchildren, without paying gift, estate, or
generation-skipping tax. Generation-Skipping Tax Exclusion Source:
IRS
(http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/What%27s-New---Estate-and-Gift-Tax)
Slide 17
16 COLLEGE SAVINGS PLANS: ESTATE PLANNING 50-Year History of
Estate Tax Exemption Sources: IRS
(http://www.irs.gov/uac/Newsroom/Annual-Inflation-Adjustments-for-2013),
IRS (http://www.irs.gov/pub/irs-soi/ninetyestate.pdf)
Slide 18
17 COLLEGE SAVINGS PLANS: ESTATE PLANNING Exemption Annual
exclusion for gifts Up to $14,000 for Individual Gift Tax Exclusion
$28,000 if married Gift Splitting 529 Plans allow a lump sum
contribution in an amount equal to five times the federal annual
gift tax exclusion Pares down estate, which reduces potential
estate tax liabilities Considered completed gift Eliminates annual
income tax that otherwise would be paid on investment earnings
Value of the account will be included in the beneficiarys estate
Tax-free growth outside of account owners estate and preserving
more of estate for loved ones after death Gift Tax Provision: High
Limits Source: IRS (www.irs.gov/pub/irs-pdf/p950.pdf)
Slide 19
18 COLLEGE SAVINGS PLANS: ESTATE PLANNING Forward gifted
amounts inside a 529 are not considered part of an estate Forward
gifted amounts, with the exception of any earnings, will be counted
as part of the estate if the contributor passes away within the
5-year timeframe. Example 1: Married grandparents contribute
$280,000 in the year 2013 to two grandchilds 529 accounts, with
$140,000 going to each account. The grandparents both pass away in
2016: $224,000 for years 2013, 2014, 2015 and 2016 are excluded
from any estate taxation, and $56,000 for year 2017 will be subject
to estate taxation. Five-year forward gifting provision Up to
$70,000 ($140,000 per couple) per beneficiary in a single year,
with the special five-year forward gifting provision Forward
Gifting/Estate Tax Benefits Source: IRS
(http://www.irs.gov/irb/2008-09_IRB/ar17.html#d0e2976;
http://www.irs.gov/irb/2008-09_IRB/ar17.html);
http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapF-partVIII-sec529.pdf)
Slide 20
19 COLLEGE SAVINGS PLANS: ESTATE PLANNING Forward Gifting:
Example 1. Recipient Year Amount Gift Tax Exclusion Used
20132014201520162017 Grandchild 1 2013: $140,000 $28,000 Grandchild
2 2013: $140,000 $28,000 Removed from Estate$56,000 Grandparents
Gifting to Two Grandchildren; Death of Giftor
Slide 21
20 COLLEGE SAVINGS PLANS: ESTATE PLANNING Forward Gifting:
Example 2 Donor Contributor Year Amount Gift Tax Exclusion Used
2013201420152016201720182019202020212022 Grandfather 2013: $70,000
$14,000 Grandmother 2013: $14,000 $14,000 Grandmother 2014: $46,000
$9,200 Grandfather 2018: $70,000 $14,000 Total Contributed Per
Year$28,000$23,200 $14,000 Total Contribution Over 10 Years:
$200,000
Slide 22
21 COLLEGE SAVINGS PLANS: ESTATE PLANNING Advantages of
Selecting 529s Over Trusts Advantages of Liquidating Trusts to Fund
a 529? Advantages of Keeping Money in Trusts Advantages of
Trust-Owned 529 Plan Trust Interaction with 529 Plans
Slide 23
22 COLLEGE SAVINGS PLANS: ESTATE PLANNING Greater control of
assets Asset growth & qualified withdrawals are tax free
Investment income not subject to federal kiddie tax State tax
advantages in some states. No time/age restrictions (unless imposed
by plan) Counted as parents asset for financial aid purposes
(assessed by college at lower parental asset rate of 5.64% than a
students non-529 asset rate of 20%) Owner may make non-qualified
withdrawals (subject to tax and 10% federal penalty) Less expensive
to set up and maintain Advantages of Selecting 529s Over Trusts
Source: FINRA
(http://www.finra.org/web/groups/investors/@inv/@smart/@college/documents/investors/p124094.pdf);
IRS (http://www.irs.gov/pub/irs-pdf/p970.pdf;
http://www.irs.gov/pub/irs-pdf/p929.pdf;
http://www.irs.gov/taxtopics/tc553.html;
http://www.irs.gov/pub/irs-pdf/i8615.pdf)
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23 COLLEGE SAVINGS PLANS: ESTATE PLANNING Pros: 529 plan assets
remain irrevocable Avoid having to pay taxes on the earnings
year-over-year Increase potential of qualifying for financial aid
Cons: Beneficiary will still assume control when reaching 18 or 21
529 assets transferred from Trust cant be transferred to a new
beneficiary 529 plans can only be funded in cash Assets in trusts
need to be sold prior to transferring Taxable event: capital gains
will be taxed Advantages of Liquidating UGMA/UTMA to Fund a 529?
Source: IRS(http://www.irs.gov/pub/irs-pdf/p970.pdf); FINRA
(http://www.finra.org/web/groups/investors/@inv/@smart/@college/documents/investors/p124094.pdf)
Slide 25
24 COLLEGE SAVINGS PLANS: ESTATE PLANNING Investment
Flexibility Trusts are not limited to a lineup of available options
Contribution Flexibility Trusts dont have a maximum contribution
limit Qualified Usage Use of assets are not restricted to qualified
education expenses However, assets must be used for benefit of the
child Can be used for non-qualified education expenses Travel to
and from college, dorm room supplies, medical expenses, etc.
Advantages of Keeping Money in Trusts Source: IRS
(http://www.irs.gov/pub/irs-pdf/p970.pdf)
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25 COLLEGE SAVINGS PLANS: ESTATE PLANNING Setting Up a 529 Plan
Account with the Clients Trust as the Account Owner Eliminates any
year-over-year taxes on earnings Helps to offset the expenses of
the trust (accounting costs, attorney fees, custody charges, court
fees, etc.) Especially beneficial for trusts, which have compressed
tax brackets Maximizes the after-tax return on assets in trust
intended for education Simplifies the trusts investment policy,
which lowers annual administrative fees Helps to ensure assets are
ultimately used for higher education Advantages of Trust-Owned 529
Plans Source: IRS Form 1041-ES
(http://www.irs.gov/pub/irs-pdf/f1041es.pdf)
http://www.morningstaradvisor.com/articles/printfriendly.asp?s=&docId=12968&print=yes;
http://wills.about.com/library/rp-13-15.pdf
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26 COLLEGE SAVINGS PLANS: ESTATE PLANNING Income Tax Rate
Schedule for Estates and Trusts OverBut Not OverThe Tax Is Of the
Amount Over $0$2,500$0 + 15%$0 $2,500$5,800$375 + 25%$2,500
$5,800$8,900$1,200 + 28%$5,800 $8,900$12,150$2,068 + 33%$8,900
$12,150 $3,140.50 + 39.6% 12,150 Tax Rate Schedule - 2014 Source:
IRS (http://www.irs.gov/pub/irs-pdf/f1041es.pdf)
Slide 28
27 COLLEGE SAVINGS PLANS: ESTATE PLANNING Resources to Learn
More Questions? Important Disclosure Additional Information
Slide 29
28 COLLEGE SAVINGS PLANS: ESTATE PLANNING IRS Publication 970:
Tax Benefits for Education IRS Tax Topics IRS Tax Tips
http://www.irs.gov/irm/part7/irm_07-025-044.html FINRA.org Smart
Saving for College Better Buy Degrees www.savingforcollege.com
www.collegeinvest.org Resources to Learn More
Slide 30
29 COLLEGE SAVINGS PLANS: ESTATE PLANNING IRS Publication 929:
Children and Dependents IRS Publication 950: Estate and Gift Taxes
IRS-2013-4 Announcement (http://www.irs.gov/uac/ Newsroom/Annual-
Inflation-Adjustments-for-2013) MSRB Education Center
(http://emma.msrb.org/ EducationCenter/529Plans.aspx) eFile.com on
Exclusions (http://www.efile.com/tax/estate-gift- tax/#exclusions)
H.R. 529 (http://www.law.cornell.edu/uscode/text/26/529) Resources
to Learn More
Slide 31
30 COLLEGE SAVINGS PLANS: ESTATE PLANNING
http://www.gpo.gov/fdsys/pkg/CFR-2011-title34-vol3/pdf/CFR-2011-title34-
vol3-sec673-5.pdf page 673.5 in section: 34 CFR 673.5(c)(1)(xiii))
http://thechoice.blogs.nytimes.com/2012/01/13/kantrowitz-answers-part-
5/?_r=0
http://www.fastweb.com/financial-aid/articles/3673-paying-the-college-
directly-to-avoid-gift-taxes Resources to Learn More
Slide 32
31 COLLEGE SAVINGS PLANS: ESTATE PLANNING Estate & Gift Tax
Planning Questions?
Slide 33
32 COLLEGE SAVINGS PLANS: ESTATE PLANNING Important Disclosure
An investor should consider the Programs investment objectives,
risks, charges and expenses before investing. The Program
Disclosure Statement at scholars-choice.com, which contains more
information, should be read carefully before investing. If an
investor and/or an investors beneficiary are not Colorado
taxpayers, they should consider before investing whether their home
states offer 529 plans that provide state tax and other benefits
only available to state taxpayers investing in such plans.
Investments in the Scholars Choice College Savings Program are not
insured by the FDIC or any other government agency and are not
deposits or other obligations of any depository institution.
Investments are not guaranteed by the State of Colorado,
CollegeInvest, QS Legg Mason Global Asset Allocation, LLC, Legg
Mason Investor Services, LLC, or Legg Mason, Inc. or its affiliates
and are subject to investment risks, including loss of principal
amount invested. Legg Mason, Inc., its affiliates, and its
employees are not in the business of providing tax or legal advice
to taxpayers. These materials and any tax- related statements are
not intended or written to be used, and cannot be used or relied
upon, by any such taxpayer for the purpose of avoiding tax
penalties or complying with any applicable tax laws or regulations.
Tax-related statements, if any, may have been written in connection
with the promotion or marketing of the transaction(s) or matter(s)
addressed by these materials, to the extent allowed by applicable
law. Any such taxpayer should seek advice based on the taxpayers
particular circumstances from an independent tax advisor. Scholars
Choice is a registered service mark of CollegeInvest. CollegeInvest
and the CollegeInvest logo are registered trademarks. Administered
and issued by CollegeInvest, State of Colorado. QS Legg Mason
Global Asset Allocation, LLC is the Investment Manager and Legg
Mason Investor Services, LLC is the primary distributor of
interests in the Program; together they serve as Manager of the
Program. QS Legg Mason Global Asset Allocation and Legg Mason
Investor Services, LLC are Legg Mason, Inc. affiliates. QS Legg
Mason Global Asset Allocation (QS LMGAA) is part of the combined QS
Investors investment platform, which is comprised of QS Investors,
LLC, QS Batterymarch Financial Management, Inc. and QS LMGAA. 2014
Legg Mason Investor Services, LLC. Member FINRA, SIPC. Legg Mason
Investor Services, LLC is a subsidiary of Legg Mason, Inc.
scholars-choice.com FN1412889