529 plans allow up to $190,000 to be contributed without gift tax at one time.
Federal 529 rules go a large gifting step further, allowing up to 5 years to be gifted in 1–up to $95,000 per person or $190,000 per child, grandchild, or other beneficiary at 1 time!
Rules apply to this “superfunding” strategy, as any gift amount over the yearly $19,000 maximum must be spread over the 5 years or counted against the lifetime unified credit. In other words, if you gift more than the $19,000 per person per beneficiary in 1 year, you must either elect to average the total gift amount over 5 years on IRS form 709 or use a portion of your lifetime credit. You are legally using up your annual gift tax exclusion for the year of the gift as well as the subsequent 4 years. Significantly, if the donor passes away prior to the 5 year completion, the excess amount being averaged counts against their lifetime limits. In 5 more years, the accounts can again be superfunded, receiving up to $190,000 each more, up to their maximum allowed amounts (usually near $600,000).
Remember that most will not have problems using a portion of their $15,000,000 lifetime credit. This rule will apply only to high net worth families leaving large sums to the next generations with limited taxes.
Robert’s father passes away, leaving him with $500,000 at age 69. Robert is doing fine in retirement and does not need this extra benefit. He wonders how he can pass the money tax free to his 6 children, their spouses, and 10 grandchildren. Robert gifts $19,000 to each 529 of these 22 people, and keeps the remainder for himself. He receives tax deduction on a portion of the contributions, up to the state’s maximum amount.
Cindy gifts $80,000 to her grandchild, electing to average it over 5 years instead of counting toward her $15,000,000 gift exclusion. Unfortunately, Cindy passes after 3 years. Cindy’s first 3 years of $16,000/year average make $48,000 completed. The other $32,000 stays in the grandchild’s 529 account, but must be counted against Cindy’s gross estate.
This strategy can significantly reduce the size of a taxable estate while accelerating the growth potential of the education fund. By using superfunding, individuals can effectively pass on substantial wealth while leveraging tax-free compounding over many years.
No statement or example on this site should be considered a specific recommendation for your personal situation. Investing and tax strategies each carry significant risks. Examples herein may not apply to your situation. Please consult your estate attorney, tax advisor, or financial advisor for personal advice.