The use of 529 plans, named for Section 529 of the Internal Revenue Code, have been a popular way to reduce an individual’s taxable estate; save for a child, grandchild, or other family member’s education; and receive tax-free growth of educational savings for several years. The account funds are usually invested in mutual funds, and earnings from these accounts are tax-free. (Prepaid 529 plans are an alternative to traditional investment 529 accounts; for more on these.) A recent rule implemented by the Indiana Family and Social Services Administration, the State agency that administers the Medicaid program, may give individuals another reason to take advantage of this tool.
The recent a rule addresses how a 529 account is treated under the Indiana Medicaid program. The new rule provides that funds deposited into a 529 plan is not a countable resource when determining an individual’s Medicaid eligibility. As long as the funds are used for eligible educational expenses for the designated beneficiary, funds withdrawn from the plan will not be treated as a transfer subject to a transfer of assets penalty (a period of time that Medicaid says “no help”). Eligible educational expenses include tuition, room and board, books, and more. Here is a list of all eligible expenses.
An individual can contribute up to $15,000 (in 2021) per year ($30,000 for a couple) to 529 accounts without incurring a gift tax. Or, an individual can contribute up to $75,000 ($150,000 for a married couple) in the first year of a five-year period, as long as there are no additional gifts to that same beneficiary over the five years. Contributions to accounts above these amounts result in the use of the individual’s lifetime gift tax exemption which is $11.8 million (2021).
If the beneficiary uses the funds for any purpose other than higher education, the earnings are taxed as ordinary income to the account owner and a 10 percent penalty is assessed on investment gains. If the contributor is the account owner, such accounts generally do not affect a child’s eligibility for financial aid. This change may increase a student’s chances for financial aid since qualified withdrawals will no longer be considered income to the student. Moreover, the account owner can change beneficiaries at any time, as long as the new beneficiary is a member of the original beneficiary’s family. (The tax law enacted in 2001 expanded the list of family members to include the first cousin of the original beneficiary.) Most states now permit or are planning to permit 529 account plans.
The Web site www.savingforcollege.com can help you compare the many state plans. In addition, click here for a good guide to choosing a 529 plan. Contact the Stinson Law Firm at 317-622-8181 or www.stinsonlawfirm.com to review how contributing to a 529 plan can fit into your long term care planning goals.
Jeff is Certified as an Elder Law Attorney (CELA) by the National Elder Law Foundation, a distinction held by only a handful of lawyers in Indiana. For almost 20 years, he has focused on elder law, estate planning, long-term care planning, Medicaid planning, Veterans Affairs benefits planning, special needs planning, guardianships, and estate administration.