The unique advantage with 529 plans is that the value of the 529 account is removed from your taxable estate, yet you retain full control over the account including the right to ask for the money back at any time. No other vehicle affords this combination of control and estate reduction.

Some grandparents are being advised by their attorneys, accountants, and financial planners to gift away assets to younger family members as a way to reduce exposure to the estate tax. You can make up to $13,000 in gifts each year to any other person and not be subject to the gift tax. If you do not use this year?s $13,000 annual exclusion opportunity, you lose it. However, like many people who have worked hard to build up their net worth and who are uncertain about what the future may hold, you may be reluctant to follow through with annual gifting because you do not wish to irrevocably part with your assets.

The ?excuse? not to utilize your $13,000 annual gift exclusion disappears with a 529 plan. You do not have to give up control. You can ask for the money back whether you really need it or if you just change your mind later on. (Of course, if you take the money back it comes back into your taxable estate. In addition, any withdrawal not used for the beneficiary?s qualifying higher education expenses subjects the earnings to tax and 10% penalty.)

If your contributions to a 529 plan for a grandchild, when combined with all other gifts to that child during the year, exceed the $13,000 annual exclusion, you must file a gift tax return (Form 709) and compute any gift tax and generation-skipping transfer tax. Everyone has a lifetime exemption of $1 million for gifts and $2 million for generation-skipping transfers before taxes are owed.

In any year during which your 529 contributions for a particular beneficiary exceed $13,000, you may make an election on Form 709 to spread the contributions ratably over five years (20% per year) for gift-tax purposes. This permits frontloading of up to $65,000 per beneficiary (or $130,000 for a married couple) into a 529 plan without generating a taxable gift, assuming no other gifts to that beneficiary are made during the five calendar-year period. If you make the five-year election and die before the fifth calendar year, the contributions allocated to the years after your death are included in your taxable estate.




A very preliminary review suggests to me that
Internal Revenue Code Section 529 Education Savings Accounts
have the following characteristics:

1. Unlike IRA's, 401(k) or Keogh retirement plans,
a) 529 plans are authorized and supervised by the different states,
b) 529 plans give the donor a limited choice of mutual funds
with limited options for exchanging one fund for another.
c) In Massachusetts Fidelity Investments is the most prominent
manager of 529 plans.
d) 529 plans do not give donors or owners unfettered investment choice
as do IRA's of Keogh plans.
e) I will make inquiries of Fidelity as to the choice of investment
vehicles they offer.

2. As distinct from UTMA (universal transfer to minors acts) and trusts,
529 Accounts are considered completed gifts even though the donor
retains (limited) investment control, has (in some circumstances)
the right to change beneficiaries, and has the right - subject to 
a 10 percent penalty on taxable earnings, to rescind his donation.
Such flexibility seems to me of great value if, as Mommy and I propose,
one chooses to transfer large portions of ones retirement savings
to ones family. Contributions are subject to the gift tax and its
exclusion.

3. The disadvantage of these plans, in addition to the circumstance
that they preclude extreme financial conservatism, such as has been
my investment strategy for the past 10 years, is that qualified
withdrawals are limited to approved purposes at approved institutions,
else one incurs a 10 percent penalty on cumulative earnings. 
The details, it seems to me, are of much importance, as are the hoops
through which one will be required to jump to recover ones money.
These should be assessed in detail before one commits oneself. 
I will make further inquiries and report to you.