Too many financial advisors know too little about 529 college savings plans, especially the tax advantages. At least that’s the conclusion drawn by the folks at Alliance Capital, who as manager of the nation’s largest 529 plan, Rhode Island’s CollegeBoundfund, are in a fair position to know.
To help close the knowledge gap–and while they’re at it, increase the number of CollegeBoundfund accounts (307,000 at present)–Alliance has put into high gear its relatively new advisor program, Gift of Education. Gift of Education launched in October 2000, with the first formal program offered last year.
“There are many people, including advisors, who still don’t know what a 529 plan is, or don’t fully understand the opportunities they offer,” says Jennifer DeLong, Alliance’s director of product management. Thus, while the “fourth-quarter into January” is the best selling time for 529s, due to gifting needs, Alliance “ramped up” its Gift of Education program, adding some additional selling tools and materials “that can really help advisors for the last quarter,” and rolled it out October 1, says DeLong.
The program’s educational focus is on the gift and estate tax planning benefits of 529 plans. The information is delivered to advisors via Web site materials (advisors can punch the appropriate navigation bar at www.alliancecapital.com) and mailable materials, both of the e-mail and snail-mail variety. Included are materials enumerating the benefits of 529 plans in general and those of CollegeBoundfund in particular, which advisors can in turn mail to their clients. As for advisor interest, “the materials have been flying off our shelves,” says DeLong.
While 529 plans and commonly used college savings investment vehicles such as UTMAs and UGMAs and Coverdell Education Savings Accounts allow individual gifting without any gift tax consequences of up to $11,000 per year, or $22,000 for married couples, 529s take it one step further. Unique to 529s, says DeLong, is accelerated gifting. This allows an individual to front load five years of that $11,000 gift into one year. In other words, the individual can invest $55,000 per beneficiary in the first year of a five-year period; the married couple filing jointly, $110,000 per beneficiary in the first year–both without any gift or estate tax consequences. The gifted amounted is removed immediately from the taxable estate and placed into the selected 529 plan. To put the power of accelerated gifting into perspective, DeLong uses this example: A grandparent in one year puts $110,000 into a 529 plan for each of his six grandchildren, immediately pulling $660,000 from his taxable estate with no gift tax consequences.
The only catch is that the contributor[s] cannot make any additional gift to those beneficiaries over the next five years.
Whether accelerated gifting is employed or not, normal 529 tax advantages include tax-deferred growth and tax-free withdrawals if the withdrawals are used for qualified educational expenses. If they aren’t, taxes are owed on the plan’s earnings, and there is an additional 10% federal penalty. But this flexibility, albeit with penalties, is seen as just another 529 advantage, especially to those persons making large gifts, says DeLong. “These are people who feel comfortable knowing that they can get at their money should they need it for something such as an unexpected medical expense,” she says. By contrast, gifts into UTMA and UGMA accounts are irrevocable.
The CollegeBoundfund has a maximum contribution limit of $287,070, adjusted annually to reflect tuition inflation and current costs, which factors in four years of undergraduate studies and two years of graduate school. There are 15 investment options, two of which are age-based portfolios, which become more conservative as the beneficiary gets closer to college age. According to DeLong, Ibbotson Associates helped develop the CollegeBoundfund asset allocation portfolios, which are actively monitored and periodically rebalanced.
One CollegeBoundfund option, which DeLong says is especially suitable for year-end gifting and in light of current market conditions, is the Principal-Protection Income Portfolio, rolled out last February. About 30% of CollegeBoundfund sales are going into this portfolio, she says.