You'll usually find grandparents are a willing audience, especially if you first ask them to tell you about their grandchildren, and listen patiently for the next 90 minutes. But for those grandparents with several million or more in net worth, a conversation about the grandkids could end up saving them hundreds of thousands of dollars in estate taxes. Here's how and why you should start talking with them about 529s right now.

It's A “Shift,” Not A “Gift”

Most clients who are interested in saving for college for their grandchildren will be properly and primarily motivated by altruism — they really want the money to benefit the children in question. But that motivation also presents an obstacle in the minds of many wealthy would-be depositors, since it may feel like they're forking over thousands of dollars to a two-year-old.

So it's important to emphasize that the grandparents typically retain ownership of 529 accounts, with the grandchild as a changeable beneficiary. The titling is very similar to how the clients' IRAs are set up. They own the accounts, but there is also a beneficiary named for each retirement account.

And, as with IRAs, 529 beneficiaries can be switched at any time to a wide range of other family members. Usually it can be accomplished with no ramifications and no notice to, or permission from, the former or future beneficiary (more on this next month). Or, if the grandparents get into any kind of cash crunch, at any time they can withdraw the money from the 529 account and do with it what they please. Although the withdrawal may incur income taxes and a 10-percent penalty on the earnings portion of the accounts, last month's column demonstrated that those amounts aren't quite as ominous as they sound.

They Can Afford It

The ability to maintain ownership of 529s means that grandparents can feel more comfortable sliding larger portions of their net worth into the college savings accounts. But, in case you still have some doubters, run a conservative cash flow projection for the likely length of the clients' lives. Not only will they see that they couldn't possibly spend every penny, but you might find some assets held elsewhere that were previously undisclosed.

And you may also want to point out that the deposits can be made periodically over time, rather than from a lump sum today. So, for example, Social Security checks or required minimum distributions from IRAs may serve as more acceptable sources of funds.

The Benefits Of Bigger Deposits

Still, there is a powerful reason for wealthier grandparents to make large lump-sum contributions to 529 accounts as soon as they can scrape up the funds. Under current law, federal estate taxes will only apply to amounts over $2 million in 2008, and $3.5 million in 2009. There is an unlimited exemption for 2010, and then it is scheduled to fall back down to $1 million in 2011 and beyond.

Those numbers may be changed by Congress sooner or later, and for better or worse. In the meantime, the heirs of clients with estates worth a few million dollars may owe nothing in estate taxes when the clients die, or there could be a bill for a million dollars or more coming due.

The unique status of 529 plans can help you help families not only save for future college costs, but also guard against the estate tax uncertainty with very little in the way of cost, commitment or complexity.

Currently, grandparents can deposit up to $12,000 per beneficiary, per donor, per year into a 529 account, with no gift tax ramifications (assuming no other gifts are made by the donor to the beneficiary during that time). So, a couple could deposit up to $24,000 into a 529 this year for a single grandchild, as long as they made no other gifts during the year.

But under the accelerated gifting feature offered by 529s, they could deposit much more. They can each make five years worth of $12,000 deposits right now, for a total of $120,000. For every year that the donors survive after the original accelerated gift, $12,000 per beneficiary per donor will be removed from their taxable estate until all five years of the accelerated plan have transpired.

The Upshot, With Little Downside

If the current estate tax law remains in place (or becomes more onerous), moving large amounts of money into 529 plans could save your clients' families hundreds of thousands of dollars in estate taxes (see example).

But if the law is changed to a more amenable amount, your clients can pull some, or all, of their money back out of the 529s and do with it what they wish, paying only a small portion of the proceeds in taxes and penalties.

Of course, they would probably prefer to leave the 529 accounts as they stand, and continue to enjoy tax-free status on the earnings and withdrawals as long as the proceeds are used for qualified higher education expenses.

The Time Is Now

The net benefits of putting money into 529 plans can't be achieved until the deposits are actually made. And the sooner the better, as qualified deposits made before December 31 of this year will be removed from the clients' taxable estate.

At least the urgency surrounding the issue will provide you with a tactful reason to interrupt the grandparents' monologue on their grandchildren's brilliance.

Writer's BIO:

Kevin McKinley CFP© is Principal/Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid a Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. Find out more at

Windfall For College

Say you have a 70-year-old couple with $3 million in total assets, and five young grandchildren. The clients are interested in helping to pay for the kids' future college costs, but also concerned about the uncertainty of the federal estate tax exemption.

You suggest funding 529 accounts right now for each child to the fullest extent possible without incurring a gift tax — $60,000 per donor, per grandchild, for a total of $600,000.

Based on current law, here's a rough estimate of how much the move might save their heirs in estate taxes, if the grandparents both die in the particular year:

Note: The amounts indicated are the difference between the federal tax liability of a $3 million estate, and what the liability would otherwise be using the accelerated gifting plan. This example assumes that in the latter scenario, the net taxable estate values would be $2.88 million in 2008, $2.76 million in 2009, $2.64 million in 2010, $2.52 million in 2011 and $2.40 million in 2012. In both scenarios it assumes no growth or loss in either the net values of the estate, or the 529 college savings accounts.
Source: calculator