A 529 is marketed as the kids' college account, but it's really a wealth transfer tool.

[02:32]

"Well, sure, I'll say that I would say the great vast majority of folks view 529 as the way it's been marketed and sold to them as the kids college savings account, and in reality it's anything, but it's not the kids."

[24:22]

"I'll give you an example: a grand father and grandmother in their 70s with six kids and 36 grandkids. Yes, they're, they're here in utah. Uh, instantly, they are getting 42 people with five, two, nines, um, moving six and seven million dollars out of the states straight away by simply using 529s."

[06:15]

"The owner passes and the successor owner inherits the money outside the estate, get the estate tax free and inherits the owner's basis. So that's really important to know."

Full transcript

Hello everybody. My name is richard c wilson, a founder of the family office club, and today I have with me bill atha, a friend from morgan stanley, and chris stack from savingforcollege.com, and we're going to be talking about 529 savings plans. So welcome bill, welcome chris. Thank you. Thank you great, uh, bill. Do you want to go first?

Just adding maybe one or two minutes of background just on who you are and what your expertise is in sure, thank you, richard for having me. I'm very passionate about 529s. My name is william atha. I'm a family wealth director, senior vice president and wealth advisor at morgan stanley and the primary advisor for family office club. Great, thank you.

And chris, can you give a little bit more background on saving for college and just your expertise in general? Sure, well, saving for college.com is considered the leading independent resource and authority on 529 plans. If you have any questions looking for any information on any of the more 100 plans and 529 of the tax code itself, saving, savingforcollege.com is the place to go. I am a new york attorney that affiliated uh with that's been affiliated with savingforcollege.com since 2000 and I work with financial advisors such as bill, as well as their clients and different investment management firms and broker-dealer firms as well, and I'm delighted to be here.

Great well, thank you both. So a lot of people know the very basics of what a 529 college saving plan is, and I'm not an expert in the area. That's why I'm interviewing the two of you and I know, on the very surface level, a lot of people's understanding is that if you put money into these plans, it can be a tax efficient way to save for your kids college and that in some states there is an incentive against state income taxes to do so. And in some of these plans, or maybe all of them, which we'll find out in a second, there's some flexibility on the types of education it's used for, and if it's not used for one kid, it can be used for maybe another kid in the family or another person in the family.

So, before we get into some of the more sophisticated areas that are not overly obvious, can we clear up on a high level kind of what I got wrong there, or a common misconception, and just kind of define what these really are for people. Well, sure, I'll say that I would say the great vast majority of folks view 529 as the way it's been marketed and sold to them as the kids college savings account, and in reality it's anything, but it's not the kids. They never have any rights or entitlement to that account. You're not committed or obligated to use it for college and it's clearly not a savings account.

I don't need someone like bill atha to help me open up a savings account. This is an investment account which entails risk and hopefully, rewards, and so I need to be able to navigate the financial markets. As with any investment, 529 is no exception. So, uh, since we've dispensed with what it is not, though commonly perceived, we need to address, that is, a tax deferred investment account that gives the individual owner the opportunity, but no obligation, to spend it free of federal and state tax for educational purposes.

That's been expanded to now include tuition starting at kindergarten and going through graduate school, most expenses at graduate school and even beyond, since they can be used tax to make student loan payments. But I think uh we're here today also to talk about the many other value that can be derived from owning assets in this type of account, and it's really uh individuals who family office would look to serve who could mostly benefit from 529 accounts, and so I think the the benefits that we can speak of as to asset protection and the opportunity to retain control over an asset that is outside one's taxable estate makes it particularly appealing and valuable uh to those client types, right, right, okay, and I guess bill can. Uh, can you expand a little bit on why these are so important or critical in terms of the planning you do with your clients from your perspective? Yes, it's really eye-opening for most people that listen to uh chris, or chris and I uh present on five two nines.

There's really four things to take away um that are really important in five two nines, obviously, uh first, even for the cfp exam, they teach professionals to uh prepare and calculate for the cost of college and the 529 plan is the most often chose plan. Um chris pointed out, we can now do k through 12, but also college and grad school, but a lot of people don't know that it's really qualified institutions, which could include art school, dive school, golf school, flight school and other you know qualified institutions. The second thing is which a lot of people don't know is that it's a great tool for wealth transfer, for wealthy estates. First, uh, you know if you had assets and you're above the state tax exemption now, over 23 million at this time, you know the trusted state's attorney is going to use grant to retain annuity trusts, charitable lead annuity trusts or intentionally defective grant door trust to try and start moving a lot of those assets out of your state.

But in fact, the first thing you can do is put money into five two nines. From the time you put money into five two nines, it's considered a completed gift and the money is out of your estate, but you have access to the money. That makes it extremely unique. There's no other vehicle that I know of where you can gift the money away but still have access to the money when you pass.

The owner passes and the successor owner inherits the money outside the estate, get the estate tax free and inherits the owner's basis. So that's really important to know. Also, if you are not easily insured or haven't structured your estate or you started your wealth transfer planning late, this is a really great vehicle. I had a 90 year old client who gave most of his estate to his uh older child and was laid in trying to do wealth transfer for the other two children having had cancer, and we set up a series of five, two, nines as an example and four years later he passed away and that money transferred to the other two children straight away in a way to create uh equality, equanimity for the estate, and I think that's very important.

The third thing I think everyone should know is that uh, you can use five, two, nines for long-term care and disability. Many people do not know this and that's very important because it's hard to get a long-term care policy uh past the age of 65. It's expensive and qualification is tough. Plus, the length of term of a long-term care policy is much shorter these days because people are living much longer.

So you can use these to self-insure and this is probably one of the largest areas of use. For most of the planning I do for clients, we set aside large uh buckets of money, uh allocated to five, two, nines. It's just a savings plan and you can use it for long-term care, disability, wealth transfer and, lastly, also for asset protection. I tend to put most of my clients money in states that have asset protection.

A great example is the state of south carolina, where the operation of law for that state, because this is a contract with this state, does uh protects the client and the money from judgments, bankruptcy or divorce. Those four things, education, wealth transfer, long-term care and disability and asset protection, are amazing features offered by 529s. Wow, so, if I understand right, I could be putting money into a plan for each of my three kids. Uh, we're like putting one into these three plans and then, as I get older if their college ends up being covered by a scholarship or they go to one where we can afford it without touching that, this could be a way to pay for my own long-term care.

You know, hopefully that's not for 60 years from now, but it'd be that optionality. Or if I pass away and don't use it for that, it's a way to keep it out of the estate taxes and passed on to the next generation. Did I understand that correctly? That's correct. And uh, I might add, there is one other idea.

A lot of accountants asked me about that. Um, it's actually like a ira on steroids, so you could also use it for your own use or money in future years. It's tax deferred. It will grow faster than a regular account, a regular taxable account, even with the same managers in the same asset allocation. There are no required minimum distributions.

You can keep adding to it and the three buckets of taxation are: if you use it for qualified education, the distributions are tax-free and there's no penalty. If you use it for long-term care or disability, the taxation is ordinary income at your tax bracket, but only on the growth portion of the money, unlike an ira where you're taxed on the whole distribution. Right, and lastly, if you decide to take the money back and use it yourself in future years, it's taxation only on the growth portion of the money and with 10 penalty, but again, ordinary income tax at your bracket and only on the growth portion of money. This is an incredible savings account with multiple uses, right, right, I remember I was planning to ask you about, you know, is it inefficient for non, you know, uh, educational uses?

And I guess that answers that question um of what those different levels are. And the main takeaway there is that the, the principal amount, is not what you're paying the taxes on, it's the amount that it's grown since you invested the money, which is very different from an ira, right, okay, and I think it's correct apples and oranges type of situation. All the attributes that bill just described, uh, really position it to be thought of more than just an education funding tool, because you know, it's as much about the journey as it is the destination and, you know, for as long as you have it invested in the 529 account, it's enjoying tax-free compounding and there's no required minimum distribution or requirement. The account ever closed uh, which you know positions it well for generational transfers of wealth and in fact many uh advisors like bill are now uh recognizing this as a preferred vehicle in light of the demise of the non-spousal stretch ira.

So not only is there no required minimum distribution or the requirement the account close, it is accumulating tax deferred like an ira, but outside the contributors, the account owner's taxable estate. So it really uh actually proves to be a superior uh vehicle in many ways to the stretch ira, right? So, if I understand correctly, you know I have three kids but I set up one 529 plan per kid and I'm guessing there's a limit I can contribute per child in the family, or is that completely wrong? And it's one per person or poor, per husband, wife, etc.

So when you establish the account there you're going to involve three names. You would be the account owner in full control at all times you're required to identify a designated beneficiary that I refer to as future college student, maybe. And then the third name would be your transfer on death successor owner, um, and so you don't need to get all wrapped up about giving money to the kids, because that, in actuality, only occurs for gift tax purposes, not in the real world aspect. And so you have the opportunity, it's donor donate.

You want to open up as many accounts as possible, because every account is a new opportunity to transfer wealth and fund an account. Currently, 529 plans accept as much as 500,000 or more, and then unlimited growth after that point. So you could uh use a combination of your annual gifting and unified credit to uh in one afternoon funded and count for half a million dollars, and then exercise full control, with an option to use it tax-free, protected against judgments, liens, creditors and accumulated it outside your taxable estate, even though you have daily access, liquidity and control. So, if I understand you correctly, this is not limited to some 2500 per year type investment.

You can invest up to five hundred thousand dollars in these or is there an annual limit and it builds up to that half a million? But it sounds like you can put in up to that half a million right away. That's correct. And, and your reference to 2500 goes back to an early point. You reference richard, which is a state tax deduction.

A lot of people get confused. They are certainly well intentioned and beneficial to motivate people with an immediate benefit, but I consider that the cherry on the icing on the cake, because people do get confused that they should not invest more than what the state detached state tax deduction allows, and that can range from unlimited and offered by four states under their tax laws for their state plans. Uh, to you know, a thousand dollar uh deduction. So, um, it is uh a a great uh benefit to, uh benefit, uh recognize and benefit from, but it it really is the tail that should not wag the dog.

The state tax deduction: okay, great. And I just have two more questions because I try to wrap up here without picking up too much of your guys's time here. But, um, how have these plans really changed over the years and what do you think the future of these plans look like? I know that some tax changes are being proposed by biden.

I haven't heard 529 plans are part of that, but I'm not on top of it as much as you two are, um, so any changes coming in the future that you both see well, since 529 was enacted in 1996, there have been about a dozen legislative changes, all to enhance 529 plans and uh. We anticipate that this trend will continue. We have in this nation over 1.5 trillion dollars of outstanding student debt, and so this is the primary uh solution offered by congress. I don't anticipate, then, to uh enact any adverse change to these programs.

They have full confidence in the states, who serve as fiduciaries on these plans, and I expect them to continue to reward the families who choose to sacrifice, save and invest rather than, you know, just handouts through uh grants and so forth. I'll point out that there has been a legislation proposed, maybe again, that would allow the conversion of 529 accounts that have been opened 10 years or longer tax-free to a roth or the account owner or beneficiary, so those type of enhancements are what we foresee. There was an attempt to withdraw some of the 529 features by the obama administration. That was quickly rebuffed by leaders of both parties in congress, and so I think that proved to many, uh what I long suspected: that 529's, or the baby sister to social security, being the third rail of politics.

So I very confidence I lose no sleep over the uh political future 529 plans and those who choose to start participating sooner will realize those benefits later. Sure, uh, this might be a silly question, but when I'm thinking through what you said earlier about being able to pay student loans through a 529 plan, if there's somebody who's five years out of school, three years out of school, if they're making 75,000 a year and they are paying student loans every month of 500 a month, um, wouldn't it behoove them to put the money into a 529, not pay taxes on that, and then, that same year, pay their student loan debt out of the 529? Versus paying taxes on your money and then paying the student loans. Isn't it better to pass it through a 529 if possible?

Or is that not allowed and that's not the intention? And it's supposed to be the parent investing for the kid or like, why isn't everybody paying student loans, opening a 529 and flowing it through there to get tax free payments to their student loans? Well, in part because this was just uh, through recent tax law changes that this became possible, and so, um, I think the idea is, uh, you have three children, you said so. One of them, uh, may pursue more education than another.

There might be some loans resulting. You can change the beneficiary from the one that finished up earlier or was smarter and got a scholarship, to the one who needs more help, that type of thing. So flexibility is one of the also the least understood and appreciated features of 529 plans. They are not a custodial account that can only be used for a child's education.

Right, got it, william, you want to add something? Yeah, just quickly that one of the important things to know about five, two nines in terms of estate planning and gift planning is uh five to nine. Five, two, nines are unique. We know that you can use med ad and gifting, and always do for wealthy estates trying to cap the estate.

So you can put fifteen thousand dollars a year at this time, still times two if you're married, into a five to nine. But also you can front load up to five years in advance. So a hundred and fifty thousand dollars just with your annual gifting and again do five more years in the sixth year. To chris's point, you also could open an llc and max fund, what the state allows in south carolina for his example, uh 500,000.

And then you also could do other states and for other beneficiaries. One of the interesting things about a 529 is that you need to have the owner and identify the successor owner, but the beneficiary could be a family member or anyone who has a is alive, a name, date of birth and a social security number. The uh beneficiary determines taxation when a distribution is made but at no time has access to the money or any rights to the money, and so you can often set up a beneficiary and change the benefits you're at later for a future grandchild or other family member to be born, and at this time, those are still uh the valid parameters for uh front loading five, two nines and in addition to you can use your complete estate uh exclusions, 23 million, to front load a bunch of five, two nines. The amazing thing about a 529 is that you have control after you gifted it from the estate, and one of the hardest things to do as a financial advisor, I know chris goes through this as well, is to get uh clients with wealth to actually start their wealth transfer.

The vagaries of grant to retain annuity trust and charitable eat annuity trusts take 8 to twelve years and clients feel like they've lost control of the money. From the time you move money into these five, two nines, it's instantly out of the estate, but you still have access to the money at this time. I think it's one of the best vehicles for wealth transfer that we have to use, right? Yeah, it's pretty interesting.

So if I have clients that maybe have their income spiked up one year and um, it might be something for them to consider. You know, opening several 529 plans to protect from excess taxation, maybe get them below the a certain threshold of taxation on their income for that year, based on what you said just a minute ago. Right, this would be something to consider. Yeah, even for people who aren't wealthy but have cyclical, uh, income, I think a construction worker, a real estate broker, in some years they may be able to fund their sep or max, fund their set, but they also have excess earnings and could put money into five, two, nines to access in later years where maybe they haven't had a really good year and they need more income.

It's a great point that you just made, right? Yeah, very interesting, um. So obviously I completely failed at keeping this at 10 to 15 minutes and um. So I want to thank you for your time, but also if you have any last comments on why is it that everyone just thinks of these as college-saving plans and they never talk about it in the family office space.

I've been running events in this space for 14 years. No one's ever once brought this up anywhere, except for william at a tax institute event and in hawaii this past year. I guess it was a year and a half ago now. So any last comments or comments on that? Um, and then I'll. I'll let you two go for the evening.

Well, I guess I'll. I I would say, uh, what we said from the outset: the 529 industry is largely to thank or blame for this being branded as the kids college savings account. I may be the nation's leading cheerleader for 529 plans, but I myself have no interest in the kids college savings account. Unfortunately, 529s are not, and, as I touched on, it's really the clients of the family wealth office who can maximize the benefit of 529 plans, you know, as opposed to the struggling young parents trying to make their mortgage payments and put some dollars away each month.

Um, but it's important to know that it's not the kids college savings account and it's a great opportunity to achieve many objectives at once when managing wealth. Now, this is not a current income, a vehicle. This is a wealth preservation and growth tool and probably the most efficient manner possible. And more people haven't heard about it because bill atha likes to keep that secret to himself and be the only advisor who's qualified to provide this service.

Yeah well, we hope to put an end to the secrecy, but happy to have them work with uh bill here to get these things put into place. Do you have any last comments yourself, bill? All right, just uh that often the barrier to starting the, a really good wealth transfer program, or just to generally use five, two, nines for savings, is that if you want to move a lot of money, um, you know this is a great way to do it, but now you have to keep track of a lot of different accounts. We, we do that for the client and it's a great strategy, building different asset allocations with multiple buckets.

I'll give you an example: a grand father and grandmother in their 70s with six kids and 36 grandkids. Yes, they're, they're here in utah. Uh, instantly, they are getting 42 people with five, two, nines, um, moving six and seven million dollars out of the states straight away by simply using 529s. How do you keep track of all of that?

Well, we do. In times where, uh, for all the uses of these family members, in times where the markets have gone down, equities have gone, we've tended to make distributions from five to nines that were biased to fixed income, and the reverse was true. At times where, uh, the equities had run, we actually had taken uh things from the fixed income 529. So it can also be a wealth management strategy in terms of investing as well, and so I thought I'd paint that picture for people to think about too.

Right, okay, great, awesome, well, um, if anyone listening to this would like to connect with bill or chris, um, I've been connecting to savings for college for probably four years now, and I know some members of the team there and have chris's contact details. Anyone that wants to get a hold of bill just let me know. We know each other well and are working together with some family office club clients, so I appreciate everyone's time and for everyone listening to this, I hope this is an example of the whole purpose of doing these hundred tax expert interviews. You might write something off as thinking: oh, I know about that and you think it's a relative waste of time based on some small amount you think you might be able to invest, or what it's known for.

And that's the whole point of these interviews. We obviously could have spoken for 90 minutes here and, uh, maybe we'll we'll have you back sometime, or have you speak at one of our investor events or when one of our tax panels uh, later on this year, because obviously we could have dug a little bit deeper. But I appreciate, uh, both of your time here today. Thank you very much.

Thank you, my pleasure, thank you, bye-bye, bye guys.