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GET AN "A" IN COLLEGE SAVINGS WITH A 529 PLAN

College tuition continues to increase at about twice the

general inflation rate. On average, tuition tends to increase about 8% per year.

This means that for a baby born today, college costs may be more than three times current rates when the child begins college. With tuition rates rising at such a rapid pace, college planning is crucial. It is ideal to start the college investment process when your child is young, but it’s never too late to start taking advantage of college savings plans.

A 529 college savings plan, named after Section 529 of the Internal Revenue Code, is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. A growing number of parents and

grandparents are taking advantage of 529 college savings plans. In 1999, investments in 529 savings plans totaled $5.75 billion. In 2014, this amount rose to $244 billion. 529 College Savings plans offer a wide range of benefits:

• Earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for qualified higher education

expenses. Unlike other investment accounts, earnings from savings account interest, bond interest, and stock and mutual fund value increases aren’t taxed when the owner takes a distribution and uses the money for qualified education expenses. Qualified education expenses include tuition and fees, books, room and board. The purchase of computer or peripheral equipment, computer software, or

sole purpose is to ensure that the trustee is not taking advantage of its authority. In the unfortunate event that a trustee is charging excessive fees or mismanaging the trust corpus, the Trust Protector has the ability to fire the trustee. The Trust Protector serves as a balance of power between the trustee, the grantor’s wishes as written in the trust agreement, and the trust’s beneficiaries. He or she is usually a person that was close to the grantor and is familiar with their long-term financial and personal goals. Family lawyers, wealth advisors, and CPAs are often asked to serve as Trust Protectors.

Prenuptial (or antenuptial) and postnuptial agreements are becoming increasingly popular asset protecting tools. A prenuptial agreement is a contract between two people intending to marry, which details how their assets will be divided, payment of alimony, and spousal support in the event of divorce or death. A post-nuptial agreement (allowed in some states) serves the same purpose but is

created after a couple marries. Pre and postnuptial agreements are becoming increasingly common, not only as a way to safe-guard assets in case of divorce, but also as estate planning tools. As more people are getting married later in life, and for a second or third time, pre and postnuptial agreements are being used as a means of preserving assets amassed prior to marriage. They are also being used to ensure assets will be passed to an individual’s children, rather than potentially becoming tied-up in a surviving spouse’s estate and passed out to step-children or a new spouse. Depending on state law, without a trust or pre or postnuptial agreement in place, a surviving spouse might automatically claim up to one-half of a deceased spouse’s estate. Many pre and postnuptial agreements waive this spousal claim.

All estate planning and asset protecting tools should be taken into consideration together as a whole and should be updated when life-changing events occur. Any time a prenuptial agreement is created, an attorney should insure that it agrees to any trusts that have been created, and the most current last will and testament.

Estate planning can get complicated but it doesn’t have to be daunting. With careful planning and key advisors in place you can spend your remaining years in peaceful reflection of a life well lived rather than fretting over financial matters.

Melissa, a Certified Public Accountant, has over fifteen years of diversified tax experience with a range of industries. She practices on our Wealth Advisors Team at LBMC, where she specializes in large and complex income tax returns for individuals, trusts and estates. Melissa also has substantial experience with tax planning and individual tax consulting. She works closely with our litigation department consulting on high wealth family law/divorce cases involving taxation issues and asset division.

Melissa B. Cothran mcothran@lbmc.com615.309.2216

Emily joined LBMC in early 2014 as a Staff Accountant for LBMC Tax Services. She primarily works with 1065s and 1040s and is a member of the Wealth Advisors team.

Emily Ziadeheziadeh@lbmc.com615.690.1970

saving for your child’s college education. The 529 savings plan is a great option for those who wish to take advantage of significant tax savings and numerous other benefits. Your LBMC team would be happy to help you navigate through the various choices you have when it comes to college savings.

EXECUTIVE SUMMARY

Planning for higher education can be a stressful burden, and is undoubtedly one of the largest expenses a family will incur. 529 Plans are an excellent resource in allowing families to plan smart and early for these inevitable and necessary costs. A 529 Plan is a prepaid savings account, allowing families to fund future qualified higher education expenses including tuition, books, room and board. Both principal and earnings are considered tax free distributions when made to pay for these qualified expenses. Control of the funds remains with the individual who set up the plan, not with the beneficiary. Numerous investment options (within the 529 Plan) and the ability to roll the plan are also perks, allowing flexibility through the years. Unlike other college savings methods, 529 plans do not have income restrictions, making them a unique planning tool for all taxpayers. Your LBMC advisor is here to help with any needs you may have in education planning.

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Age-related cognitive impairment and dementia among senior

citizens are on the rise in the United States. In an increasingly complicated world, even a mild impairment can make it difficult for a once independent person to manage his or her own financial affairs.

Early estate planning is one way to insure that as you age, your assets will be protected and managed with your best interests in mind. One common method is the creation of a revocable living trust (“living trust”). The living trust is the simplest form of all trusts. It is created by “the grantor” while he or she is alive and of sound mind. The terms of the trust agreement are entirely up to the grantor. Because it is “revocable” the grantor can change the terms of the trust as their circumstances

or wishes change. The grantor acts as trustee of the living trust until he or she is no longer able to do so, at which time, a successor trustee, selected by the grantor, manages the trust on behalf of the grantor.

The trustee is legally bound to manage the assets in the trust for the long-term benefit of the grantor and any beneficiaries that the grantor has named. As the grantor’s capacity to manage his or her own financial affairs diminishes, the trustee acts on their behalf to pay bills and oversee bank accounts, make investments, pay taxes, collect rent or unpaid debts, purchase

insurance, and other duties written in the living trust.

Careful selection of a trustee is important because once the grantor has become incapacitated or has passed the trustee holds ultimate authority over the trust. The trustee should be an independent person, bank, trust institution or trusted family member. The trustee’s primary responsibility is to administer the trust in strict accordance with the trust document.

One way to provide an additional layer of protection is by appointing a Trust Protector. A Trust Protector’s

Internet access and related services is also considered a qualified education expense as long as it is to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution.

• In most states, earnings are free from state taxes if used for qualified higher education expenses. In the state of Tennessee, contributions to and distributions from, Tennessee and non-Tennessee 529 plans are specifically exempt from all Tennessee state, county, and municipal taxes.

• The owner of the 529 plan remains in control of the funds. With few exceptions, the named beneficiary has no legal rights to the funds so you can assure the money will be used for its intended purpose.

• A 529 plan is very low maintenance. You can easily enroll through the plan’s website and set up automatic investments that link directly to your bank account. The ongoing investment management of the account is handled by an outside investment company hired as the program manager or by the state’s treasurer’s office.

• Generous contribution limits exist, regardless of income level. Unlike Roth IRAs and Coverdell Education Savings Accounts, 529 plans have no income limits, age limits, or annual contribution limits. There are lifetime contribution limits, which vary by plan, ranging from $235,000-$400,000.

• You choose the investment strategy that is right for you and your student.

• You can rollover your funds into another 529 plan one time in a 12-month period.

• You can contribute to a 529 savings plan and a Coverdell Education Savings Account during the same year. You can also claim the Hope credit or Lifetime Learning credit in the same year you withdraw funds from a 529 plan to pay for qualified education expenses.

• Your child may choose any accredited college, university, or vocational school.

• The savings account may be transferred to another family member. This is beneficial if, for example, the plan beneficiary receives a scholarship and doesn’t need the money saved in the 529 plan.

• A 529 plan offers simplified tax reporting. Contributions to a 529 plan do not have to be reported on your federal tax return. You won’t receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.

• 529 savings plans offer favorable federal gift tax treatment. Contributions are considered completed, present interest gifts for gift tax purposes, which means that they qualify for the $14,000 annual gift tax exclusion. You can also elect to treat a 529 plan contribution of $70,000 as if it were made over a five calendar-year period and completely avoid gift tax. Making this election does require the filing of a gift tax return

• 529 savings plans offer favorable

federal estate tax treatment. Contributions are not considered part of an estate for federal tax purposes. However, if today’s gift is spread over five years and the account owner dies within the five years, a portion of the gift will be included in the estate.

There are a great deal of benefits associated with using a 529 college savings plan as an investment vehicle for college expenses, but there are also a few potential drawbacks.

• You must use the money for college. If you withdraw the money and use it for something other than qualified education expenses, the earnings will be subject to a 10% penalty. The earnings will also be subject to federal and state taxes according to your current tax bracket. If your children complete college, and there is money remaining in the savings account, this money will also be subject to federal and state taxes, as well as the 10% penalty. Therefore, when investing in a 529 college savings plan, it’s a good idea to err on the side of underestimation.

• The portfolio allocations may only be changed twice per year or upon a change in beneficiary.

• Your investment options are limited. For example, if you find an opportunity where your money will earn a higher return and decide to move the money from your 529 savings plan to a different investment vehicle, you will be subject to the 10% penalty and federal and state taxes.

The rising costs of tuition make it more important than ever to start

IT'S A MATTER OF

Gretchen is a Senior on the Wealth Management team at LBMC. She focuses on tax planning for high net worth individuals. Gretchen prepares corporate, partnership, individual, trust, gift and foundation tax returns. She is a Certified Public Accountant and holds an Intacct Accountant Partner Certification.

Gretchen Batesgbates@lbmc.com615.309.2355

Americans today are living longer than any previous generation. While some fortunate senior citizens remain mentally acute their entire lives, others are not so lucky.

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