Estate Planning and College Tuition

Many people do not realize that estate planning and college education goals can be accomplished at the same time.

If you have an estate subject to estate tax, you may be able to reduce your tax burden upon your death. Many individuals with large estates wish to reduce their estate by making gifts while they are alive.

Gifts of up to $13,000 can be given without incurring a gift tax. Although making gifts to others is an effective way to reduce estate tax, it may not sufficiently reduce the estate or the individual making the gifts may be concerned that he or she will eventually need the money.

Saving for college tuition through the new Utah Educational Savings Plan for a child, grandchild or other family or non-family member is an effective way to reduce one’s estate while helping someone obtain a college education.

Utah’s state college tuition savings plan is one of the best in the country for tax savings.

First, a participant in the Utah plan receives state income tax deductions for contributions (up to $1,315 per individual, $2,630 if married filing jointly) to accounts established for beneficiaries before their 19th birthday.

Individuals can contribute a total of over $100,000 to a single beneficiary’s account and $65,000 in a single year without incurring a gift tax.

Contributions to the accounts grow tax deferred for both state and federal taxes. If the proceeds are used for education, the proceeds, when withdrawn, will be taxed at the student’s income tax rate.

The proceeds in the account can be used to pay for college at any institution, whether in or outside of Utah.

Significantly, there is a 10% penalty if the money saved is not used for college expenses. However, if the beneficiary of the account decides he or she does not want to attend college, the account can be transferred to a different family member without penalty.

The most important aspect for estate planning purposes is that although assets contributed to state tuition plans are out of one’s estate for estate tax purposes the person contributing the assets can get the assets back if he or she needs them.

The participant would have to pay a 10% penalty but he or she could get the assets back. This is the only estate planning tool that allows one to reduce his or her estate but yet still have the power to reacquire the assets if needed later.

In conclusion, contributions to a Utah Educational Savings account can be a useful estate and financial planning tool.

Jeffery J. McKenna is a local attorney licensed in three states and serving clients in Utah, Nevada, and Arizona. He is a partner at the law firm of Barney, McKenna and Olmstead, with offices in St. George and Mesquite. He is a founding member of the Southern Utah Estate Planning Council. If you have questions or topics that you would like addressed in these Wednesday articles please email him at jmckenna@www.barney-mckenna.com or call 628-1711.