Iowa residents who are worried about estate taxes often place their assets into irrevocable trusts. The trouble with this strategy is that the terms of irrevocable trusts cannot be amended, modified or terminated without the permission of the trust’s beneficiaries. This makes irrevocable trusts a poor choice if circumstances are likely to change in the future. Qualified tuition plans offer a more flexible option to individuals who would like to reduce their estate tax exposure.
Qualified tuition plans are usually referred to as 529 plans as the rules governing them are contained in Section 529 of the Internal Revenue Code. The rules were changed in 1996 to encourage individuals to put money aside to cover future education expenses. The chief benefit of 529 plans compared to irrevocable trusts is that their beneficiary designations can be changed and the money placed into them can be withdrawn in an emergency. However, using these funds for purposes other than education expenses will usually result in a tax penalty.
Most people who set up 529 accounts do so to ensure that their children will be able to attend college, but the IRS also allows nieces, nephews, grandchildren and certain other family members to be listed as beneficiaries. Another reason 529 plans are popular is that they can be frontloaded. With a 529 plan, up to $150,000 can be transferred in a single year without incurring a federal gift tax.
Attorneys with estate planning experience may suggest ways to make irrevocable trusts more flexible to individuals who do not have family members that would qualify for a 529 plan. Attorneys could suggest appointing a trust protector to step in if trustees make poor decisions or to resolve conflicts between trustees and beneficiaries. When grantors would prefer not to appoint a trust protector, attorneys may recommend granting beneficiaries a power of appointment.