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Bailing out of the Independent 529 Plan
If an Independent 529 Plan beneficiary decides not to attend a
participating private college using prepaid tuition, or doesn't gain
admission to one, you can still use your contributions in the
Change beneficiaries with no loss of benefits.
Roll the funds into a state-sponsored 529 plan. You'll recoup your
principal contributions plus or minus 2% per year, depending on the
performance of the account investments. But you'll forfeit the value
of your Independent 529 discounts.
Take a refund. But note that if you use the funds for qualified
college expenses, you'll lose the tax benefits and discounts of the
Independent 529. And if you use the funds for any other purpose,
you'll owe an additional 10% penalty.
In short, Independent 529 funds aren't locked in forever, but if you
withdraw them you may face some consequences.
Married with children?
Bypass and QTIP trusts can help you benefit your spouse and then
The estate taxís impact is gradually decreasing until the tax is
eliminated in 2010. So it may seem that estate planning is no longer
critical ó but that is not the case. And unless Congress passes
further legislation, the estate tax will return with gusto in 2011.
Even with the benefit of increased exemption amounts over the next
five years, you and your spouse may quickly meet the exemption
limits if you own a home that has significantly appreciated, have
life insurance policies whose proceeds will be includable in your
estate at your death or have a securities portfolio. But reducing
taxes isnít the only concern. Youíll also want to ensure your assets
are distributed according to your wishes, such as first to your
spouse and then to your children. A bypass trust and a qualified
terminable interest property (QTIP) trust can help you achieve your
estate planning goals.
1. Bypass trusts
A married individual may leave an unlimited amount of assets to his
or her U.S. citizen spouse estate tax free. But if the surviving
spouse dies with an estate worth more than the estate tax exemption
amount ($1.5 million in 2004), the excess assets will be taxable ó
wasting the first estate tax exemption.
Thatís where the bypass trust (also known as a credit-shelter trust
or exemption equivalent trust) can help. This vehicle allows both
you and your spouse to take advantage of the federal estate tax
exemption, thereby reducing your estate taxes, without having to
give assets to your children or other loved ones on the first
Bypass trusts can provide for the surviving spouse to have almost
unlimited access to the funds. Flexibility is key to ensuring the
surviving spouse has funds for health care or education or to
maintain a standard of living. But if the surviving spouse has other
assets he or she can use, it may be best to use the funds in the
trust only as a last resort. Why? Because bypass trust funds will
pass estate tax free at the surviving spouseís death.
Letís look at an example. Suppose Jackís estate is $5 million,
Jackieís estate is $300,000, and, at Jackís death this year, his
estate can take full advantage of the available lifetime exemption
amount. If Jack has funded a bypass trust up to the lifetime
exemption limit ($1.5 million in 2004), the remainder of his estate
($3.5 million) will pass to his wife estate tax free. To reduce the
tax bill on Jackieís estate, which is now $3.8 million, she should
spend the bypass trust assets last because they can pass estate tax
free at her death. Keep in mind that you must also consider the
income tax impact, but generally the estate tax benefits will
outweigh any income tax cost associated with the strategy.
2. QTIP trusts
If your assets are greater than your spouseís (or vice versa) and
youíd like to ensure they are distributed according to your wishes
while benefiting your spouse after you are gone, consider using the
QTIP trust instead of, or in addition to, a bypass trust. (Using
both trusts together is often called an A-B arrangement.) It allows
you to provide your surviving spouse with income from the trust for
the remainder of his or her lifetime.
QTIP trust assets qualify for the marital deduction (and therefore
pass estate-tax free) but are included in the survivorís estate. To
qualify, the surviving spouse must receive all trust income
throughout his or her life.
The difference between using a QTIP trust and simply giving the
assets to the surviving spouse is that, with a trust, the surviving
spouse has virtually no control over how assets are distributed at
his or her death.
Protection for your family
There are a number of steps you can take to care for your spouse and
children after youíre gone. Bypass and QTIP trusts are just two
strategies you can use. Just be sure to plan carefully for your and
your loved onesí needs before taking action.
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