‘Tis the season for gift giving! Having a hard time finding the right gift for loved ones? Would you like to provide them with something beneficial for their future while also enjoying a little tax savings? Well, look no further than a gift to a §529 plan! But this isn’t just any old gift to a §529 plan. It’s a super gift that’s full of tax-free earnings for them and estate tax savings for you!
As we enter the gift-giving season, let’s first talk about the gift and estate tax adjustments due to inflation and the “One Big Beautiful Bill” (OB3) updates. The annual exclusion, which is the amount any donor can gift to any one donee during a calendar year, was increased to $19,000 for 2025 (and 2026). Additional gifts that exceed this amount would begin reducing the donor’s Basic Exclusion Amount (BEA). The BEA is the amount of assets any one donor can gift during their entire lifetime without paying gift tax. For 2025, the BEA was increased by inflation adjustments to $13.99 million. OB3 has made the 2026 BEA $15 million per donor and will be increased for inflation thereafter. Please take note that the Generation-Skipping Transfer (GST) tax also currently has a $13.99 million exemption that will increase to $15 million on January 1, 2026.
A §529 plan is designed for donors to help save for education while allowing for both tax-free growth and tax-free distributions, assuming they are made for qualified educational expenses. Penalties are incurred on distributions that are not used for qualified educational purposes as well as income tax assessed on the earnings portion of those distributions. With recent legislation, qualified distributions have been expanded, making §529 plans a more attractive vehicle for not only post-secondary education but also other educational opportunities. Qualified expenses now include K-12 tuition at public and private institutions, apprenticeship and trade school costs, continuing education program expenses, and student loan repayments. Additionally, a portion of unused §529 plan funds may be rolled into a Roth IRA (if certain requirements are met).
“Super funding” is an estate planning strategy that allows a donor to elect to gift five years’ worth of annual exclusions ($19,000 in 2025, totaling $95,000) to a §529 plan for any one donee all at once. For married couples that gift-split, the maximum contribution can reach $190,000 per donee. For example, a grandfather (GF) and grandmother (GM) with 10 grandchildren could, in 2025, contribute a total of $190,000 to each grandchild’s §529 plan, effectively removing $1.9 million from their estate with no effect on their BEA or GST exemption.
There are a few things to note with the “super funding” election:
- §529 accounts are generally excluded from a donor’s gross estate. If a donor makes the “super funding” election and dies during the five-year period, the amounts allocated to the period after the donor’s death would be includable in their gross estate.
- Total §529 plan contributions cannot exceed $95,000 ($190,000 if married and splitting gifts) per donee in a tax year, or the donor will need to use their BEA to offset the excess. This also assumes no other gifts were made to the donee during the year, as prior gifts can reduce the total available “super funding” amount.
- Future increases in the annual exclusion allow for additional gifting opportunities.
To make the “super funding” election, a timely filed gift tax return (including extensions) must be submitted. The checkbox on Form 709, Schedule A, Item B, must be checked, and a statement with appropriate disclosures must be attached to the return. If there are no reportable gifts for the remainder of the five-year period, there is no requirement to file subsequent year gift tax returns to report the remaining portion of the “super-funded” amounts.
Many states, such as New Jersey, New York, and Pennsylvania, offer income tax deductions on individual tax returns for contributions to §529 plans. It is essential to consult with your tax advisor regarding your state’s tax laws, as specific restrictions may apply.
Although other strategies exist to fund a loved one’s education and reduce a donor’s estate tax burden, “super funding” §529 plans provide a unique way to create sizable education benefits. The ability to achieve tax-free growth over a long period, a broader scope of qualified expenses, and the possibility of rolling a portion of unused funds into a Roth IRA make the §529 plan a very attractive savings tool.
So, give the gift that keeps on giving and “super fund” a §529 plan for those on your nice list this year! As with any estate planning strategy, please consult your WG tax advisor to determine what is right for you.
Questions? Ask a WG Advisor
