Beginning in January, a client can give away up to $14,000 worth of assets to each recipient, with no limit, and face no gift tax consequences.
Of particular interest to advisors working with wealthy parents and grandparents, the special 529 plan tax break rises from $65,000 to $70,000 next year. A client will be able to invest up to five years’ worth of gift tax exclusion amounts in 529 plans for any number of beneficiaries.
Grandma Flo, for example, could put $70,000 into a 529 plan for little Amber, $70,000 into a 529 plan for little Brett, and so on. She’d use up five years’ worth of gift tax exclusions for each recipient and she’d have to file gift tax returns, but she would not owe gift tax and would not see her estate tax shelter reduced. (If Grandma Flo dies within five years, though, a pro rata portion of the gifts will be included in her estate.)
How will the increase affect clients who already have made multi-year gifts to a 529 plan? Say Grandma Flo put $65,000 into Amber’s 529 account in 2012, effectively using up her gift tax allowance for Amber from 2012 through 2016. If she wishes, Flo can give Amber another $1,000 a year in 2013 through 2016, covered by the gift tax exclusion, or she can contribute another $1,000 a year into Amber’s 529 plan.
However, CPA Joe Hurley, writing for his savingforcollege.com website, says that such small supplemental gifts can’t qualify for the five-year upfront tax break. The five-year election can be made only for contributions that exceed the annual gift tax exclusion amount–more than $14,000 in 2013.
Suppose, though, that Grandma Flo had put $50,000 into Amber’s 529 account in 2012, spreading the amount over five years at $10,000 per year. Thus, she will have $4,000 of unused gift tax exclusion for 2013: the new $14,000 exclusion amount minus the $10,000 used up in advance.
In this scenario, Flo might contribute, say, another $20,000 to Amber’s account in 2013 and make a five-year election. Flo would be applying $4,000 a year to her annual gift exclusion for 2013 and for each of the subsequent four years.