529 Plans, Medicaid and Estate Planning 

There are technically two types of education plan authorized by Internal Revenue Code Section 529 –prepaid tuition plans and education savings plans.

By Steven J. Gibbs, Esq.

In general, 529 plans are tax-advantaged investment accounts sponsored by states or state agencies, or by educational institutions, that are designed to facilitate college saving plans. All fifty states and the District of Columbia offer 529 plans, and a conglomeration of private colleges and universities also sponsor a plan collectively. The plans are beneficial whether your student intends to attend a public or private school and can also be used for trade and vocational schools.

How do Prepaid Tuition Plans Work?
Prepaid tuition plans were started by the State of Michigan in 1986 and enshrined in the tax code ten years later. The plans allow you to purchase education credits, or “tuition certificates,” in advance for later use by the account’s beneficiary. The benefit of participating is that you can lock in current tuition rates at the time the account is opened.

Prepaid tuition plans are typically limited to tuition and fees, though a few states, including Florida, allow optional advance payment for room and board. Most plans let you pay into the plan in installments, so that you can gradually purchase credits through monthly payments over an extended period rather than through a lump-sum payment. While some plans have a minimum initial contribution, it is usually not very high. For the most part, additional contributions are discretionary, but, of course, the plan will not do much good if it is not funded.

Most qualified tuition plans are state-sponsored and include eligibility requirements and restrictions. For instance, states commonly require that either the account-holder or the student reside within the state and limit the use of the prepaid credits to in-state public schools. If the student opts to attend an out-of-state school, the funds paid into the plan can still be used for education, but without the locked-in tuition rates. If the student earns a scholarship or decides against attending college, refunds are available, but the pay-out won’t be as high as what would otherwise have been credited toward tuition at a qualifying school.

Florida offers one of the most highly-rated, and the single largest, prepaid tuition plan in the country. Florida’s prepaid plan is also among the few with an option to prepay dorm fees. To participate, either the parent / guardian or the beneficiary must be a Florida resident. And the prepaid credits can only be used at public colleges and universities in the Sunshine State and must be used within ten years of purchase, except that the ten-year period is tolled during any periods of military service by the student. A participating student who would not otherwise qualify for in-state tuition can get in-state rates through a prepaid plan, as long as he or she attends an eligible school.

How do Education Savings Plans Work?
A 529 education savings plan is an investment account, similar to an IRA, that you use to invest funds for future “qualified education expenses” incurred in providing for the education of a designated beneficiary. Qualified expenses include not just tuition and enrollment fees, but also room and board, books, computer and other

technology costs, and even off-campus rent under certain circumstances. You can use the funds for essentially any legitimate educational institution, including private elementary or secondary schools, trade and technical schools, and some colleges outside the U.S. If you use 529 funds to pay for private elementary and secondary school tuition, distributions are limited to $10,000 per year.

Education savings plans are sponsored by state governments but usually have no residency requirements. Plans typically have a menu of investment options to choose from, such as mutual funds and target-date portfolios. Investments within a plan are not guaranteed by the sponsoring states, so there is a risk of investment losses. However, some investment options (e.g., CD’s) are indirectly guaranteed by the FDIC or other state agencies. Depending upon the individual plan, the account may incur enrollment and maintenance fees along with management fees for the individual investments.

Florida’s 529 education savings plan is managed by the Florida Prepaid College Board, which in turn retains outside specialists to manage the pooled investments. The available investment options are similar to what you might expect from a 401k: money-market, indexed, and mutual funds and comparable investment vehicles. Florida’s plan does not charge enrollment, application, or maintenance fees, and management fees are limited to around 0.5%, depending upon the investment. Participants can set up recurring, automatic payments for regular contributions so that contributing to the plan requires minimal effort.

Income Tax Implications of 529 Plans
529 Plans are taxed similarly to Roth IRA’s. The money that goes in has already been taxed, and the money that comes out, including investment earnings, is not subject to any additional tax, provided the funds are used for qualified education expenses. If withdrawals are not used for qualified expenses, the investment growth is taxed as income and also subject to an additional ten-percent penalty.

You can avoid the penalty if the non-qualified distribution occurs due to one of the recognized exceptions, including the beneficiary’s disability or death. The penalty also does not apply if the funds were not needed for the beneficiary’s education because he or she earned a scholarship or is attending a U.S. military academy. If an exception applies, the account growth is still taxed as ordinary income upon withdrawal (similar to a non-qualified annuity) but with no additional penalty. Both the income tax on growth and the ten percent penalty can be avoided by simply naming a different beneficiary and using the money for his or her education.

529 account contributions cannot be deducted from federal income taxes, but a majority of states allow for either state tax deductions or credits. As mentioned above, Florida has no state income tax, hence no deduction. In some states, the tax incentives are only available if the account funds are used to attend an in-state school. If you take a state deduction or credit and end up not using the money for qualified education expenses, you may have to recapture the deductions on a later return.

Estate Tax Implications of 529 Plans
When we’re talking about estate taxes, we are referring to the Federal tax levied on the gross value of the estate that exceeds the statutory federal estate tax exemption amount. Notably, Florida has no state inheritance tax, yet this varies between the states. Whether a 529 account is “includable” in calculating a donor’s estate can vary depending upon how the account is titled. The safest way to make sure the donation of proceeds to the account is a considered a “gift” for estate tax planning purposes is to change the “participant” of the plan. For parents, this may not be feasible if the child is a minor; however, this may be an effective wealth protection strategy for grandparents who can change the participant to the grandchild’s parent or guardian. This removes doubt that the 529 account proceeds are NOT includable in the grandparent’s estate. Another important consideration is that if funds were deposited “in trust for” (ITF) the grandchild, they would be included in the grandparent’s estate.

529 Plans and Florida Medicaid Planning
Similar to the estate tax planning analysis, the general rule is if the proceeds in a 529 account can be liquidated and used by the donor, then Florida Medicaid would expect the applicant to use those proceeds to pay for chronic medical care.

The same rules that apply to estate tax planning and gifting, discussed in the paragraph above, also apply to Medicaid planning in Florida. However, keep in mind that gifts are penalized under Medicaid rules if made within the 60-month look back period. So, it is important plan ahead and formulate a great pre-Medicaid plan.

Any way you slice it, for parents and grandparents who want to assist their children in navigating through higher education without getting tangled up in burdensome student loan debt, 529 plans are a strategy that is worth considering.

Steven J. Gibbs is a trust and estate planning attorney who provides complete Estate Planning, Trust Planning, Business Planning, Asset Protection, Elder and Medicaid Planning, Real Estate, Probate and Trust Administration legal services in Florida and California. Steve’s main offices are located in Fort Myers, Florida, and San Juan Capistrano, California. Estate planning legal services are provided statewide in these locations.

The Gibbs Law Office was founded by Steven Gibbs in January 2009 upon the commitment to provide client-centered legal services.

Steven Gibbs founded the Gibbs Law Office in January 2009, committed to providing client-centered legal services.

Steve as he would rather be called, is not your typical attorney. If you appreciate the staunch egotistical mannerism of most firms, you will be delighted with Steve’s unpretentious approach to educating and then assisting his client. Instead of giving you his complacent and lofty ideas, he would rather pursue your expec

tations with professional conversation about resolving your concerns under the Law. It’s your life and it’s his job to make your legal expectations come true while using years of his guidance and knowledge.

Steve was admitted to the Minnesota Bar in 1999, the Florida Bar in 2007 and was admitted to the California State Bar in 2014.

Along his career path, he was an associate attorney for an insurance defense law firm; an in-house real estate negotiator for Target Corporation; and corporate counsel for Civix, LLC and Vice President for North American Properties where he was responsible for various real estate transactions, including legal issues and negotiating unresolved business issues. Prior to opening Gibbs Law Office, PLLC, he was an associate with the firm of Roberts & Engvalson, P.A. where he gained his knowledge of trusts, estate planing and Wills. He opened his own firm in 2008 and now focuses on laws that will enrich the needs of his clients throughout their lives and those of their children. The firm has developed a practice dealing only with Trusts and Estate Planning, Wills, Medicaid Planning, Elder Law, Real Estate, Business Law and Probate.

Quoting from Steve “I decided to practice in areas that families will need as they progress down life’s path. To help them with a solid foundation that will carry them throughout there lives is a rewarding experience for me and my staff.”

Steven J. Gibbs – Gibbs Law Office
8870 Daniels Pkwy, Suit 101, Ft. Myers, FL 22912
239-415-7495 | www.gibbslawfl.com