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  • Writer's pictureStephen Boatman

Dynasty 529 Plan

A Dynasty 529 plan is when you superfund one or multiple 529 accounts to create a college savings account for an entire family branch and possibly multiple generations. The added benefits are the lifetime of the 529 account can be greater than a human lifetime and that compounding interest can accelerate over the 50-100-year investment period. It also decreases your estate value, avoids capital gains taxes, and possibly receives state tax deductions. The powers of compounding interest get to show off within the transferability of a 529 account. Below, we will touch on a few of the critical factors surrounding this strategy, and I'll link to a much more in-depth post at the end if it seems like something you're interested in.


  1. The Tax Cuts and Jobs Act could drop the 0% estate tax limit from $13 million per person to $7 million in 2025. Using 529 accounts to move assets out of a wealthy individual's estate may be simpler and cheaper than a trust.

  2. The standard 529 contribution limit is $18k per year/contributor/beneficiary; however, with the super funding option, a couple can contribute $90k each into each beneficiary's 529. If you do this for multiple beneficiaries, a couple could move $180k per beneficiary every 5-years.

  3. It allows access to an account that grows tax-free if used for qualified education expenses.

  4. Future family members could then use this account for education expenses allowed for kindergarten - college.

  5. Beneficiaries are easy to change as the needs change between different sets of family members. Below is a list of who you can transfer a 529 account to.

    1. Spouse

    2. Child, or the spouse of such child

    3. Brother, sister, stepbrother, stepsister, or the spouse of any such person

    4. Mother, father, the ancestor of either, or the spouse of any such person

    5. Stepfather, stepmother, or the spouse of either such person

    6. Nephew, niece, or the spouse of either such person

    7. Aunt, Uncle, or the spouse of either such person

    8. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law, or the spouse of any such person

    9. First cousin

  6. There is no age limit on 529 beneficiaries. So you could be 60 years old and still be a 529 beneficiary.

  7. There is a generation-skipping transfer tax (GSTT) to be aware of. If the beneficiary, regardless of how many transfers, is within the same generation, then there's no tax due. However, if the beneficiary goes to someone of a newer generation, then whoever the old beneficiary was will be charged as making a gift to the next generation. This may not be a significant factor if the estate tax threshold is high and the beneficiary is far from exceeding it. However, any amount transferred to a new generation above the gift tax exclusion of $18k could be susceptible.

  8. A way to soften this blow is to wait until your kids have their first child of the new generation and donate to the first 1-2 grandchildren. Depending on the number of kids, you won't have to worry about the GSTT for 20+ years.


Example:

Dynasty 529 Plan: Beth and Billy are 55 and sold their company for $20 million after taxes. They aren't currently in danger of the estate tax, but, if the limit is lowered or their investment returns outpace their spending they may need to reduce their estate. They want to provide an educational benefit for their grandkids and maybe even great-grandchildren. They have three children, and two of them have kids. So they open a 529 account for each of their grandchildren and fund each with $180,000 coming out to a $360,000 contribution. Depending on their state, they may receive a state tax deduction for that year. Also, this $360,000 is out of their estate and set to grow TAX-FREE until the funds are used.


$360,000, growing at 8% for 18 years, will provide $1,438,567 for education expenses. Because this account grows tax-free for education expenses, they saved 15% * $1,078,567 = $161,785 in capital gain taxes and provided education expenses for their grandkids and possibly even great-grandchildren! If the grandkids use $150k each or $37.5k/yr for 4-years for their education expenses. After those two went to college, the account would be worth $1,748,731. If we assume the grandkids don't have any children until they are 26 and we are saving for the great-grandkids' college, the account can grow untouched for 22 more years. In 22 years, if the 529 grows at 8%, the total value will be $8,802,825!



If $8 million seems like a lot, it's because it is. But you can use these funds for private school anytime between kindergarten and 12th grade, trade schools, flight training, and much more. Or if the future generation has more kids, you could provide education expense coverage for more people.


Downsides


The downside here is that we assume many family dynamics are working together, beneficiaries are changed appropriately, account owners after the original owner are not making taxable, and 10% penalty withdrawals to purchase a Porsche 911 Turbo S. In theory, it is a great idea; however, if I know anything, it's that the further away the plan, the less accurate our expectation.

I hope you found this enlightening and as always, give me a call or shoot me an email if you want to discuss this strategy further.


Michael Kitces wrote a more in-depth article discussing these nuances in his blog post HERE if you are interested.


Flat Fee Financial Planner

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