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Text Box: (continued from page 2) will also be tax-free, provided they are used for the qualified higher education expenses of the beneficiary at an eligible educational institution. Distributions made for any other purpose, including a refund of the funds to the account owner, will be subject to both ordinary income taxation and a 10% add-on tax on the earnings portion of the distribution. This tax will be the liability of the recipient, who except in the case of a refund will be the beneficiary. Gift Tax Treatment Contributions to a Section 529 account are treated as completed gifts, even though the owner retains both the right to change beneficiaries and to have the funds refunded at any time. Transfers are not only eligible for the standard $11,000 gift tax annual exclusion, but the donor can contribute up to $55,000 in one year and elect to treat the gift as having been made ratably over five years. (Note: Several of these favorable tax rules are due to expire after 2010, unless they are extended or made permanent by intervening legislation.) Retained Control Unlike a PUTMA custodial account or irrevocable trust, a Section 529 account permits the owner to retain control over the assets. If the designated beneficiary ends up not using the funds for education, the owner can substitute a new beneficiary or have the funds refunded to himself or herself. What Are the Advantages of Using the Pennsylvania Investment Plan? While the Pennsylvania Investment Plan is available to both residents and non-residents of Pennsylvania, the clear advantage to a resident with using the Pennsylvania Plan is that there will be no state income tax imposed on qualified distributions. The state income tax results are less certain when a Pennsylvania resident uses another state’s plan. Should You Use the Pennsylvania Investment Plan?

Text Box: There are a number of factors to consider when choosing among the various state-sponsored Section 529 investment plans, including the Pennsylvania Investment Plan. Chief among these factors are: Identity of the investment manager, and its track record in achieving its stated investment goals Types of investment options that are available How non-residents are treated as compared to residents Restrictions or charges if an owner wants to change the investment mix within the same state plan Specifics of how the age-based (or years-to-enrollment) investment strategy works Fees and expenses charged by the manager Expense ratio for the each of the mutual funds offered Whether an account must be established through a broker, or whether an individual can set up an account directly Please contact us if you would like to find out more about creating a Section 529 account for a child or grandchild. Also look for a more detailed discussion of Section 529 plans in the Articles section of our website.

Current Tax Rate Information

Federal Taxes

Gift Tax Annual Exclusion $11,000

Estate & Gift Tax Exemption Amount $1,000,000

Generation-Skipping Transfer

Tax Exemption $1,100,000

Minimum Gift & Estate Tax Rate 41%

Pennsylvania Inheritance Tax

Tax Rate on Transfers to:

Spouses 0%

Children & Grandchildren 4.5%

Siblings 12%

All Others 15%

DISCLAIMER

Martin J. Hagan is licensed to practice law in the Commonwealth of Pennsylvania. This website is intended solely for informational use and is not intended to solicit clients. Likewise, any information contained in or obtained from this web site is for informational purposes only and is not intended to be used as legal advice.

IRS CIRCULAR 230 DISCLAIMER: Pursuant to Treasury guidelines, any tax advice contained in this website (or any link from it) does not constitute a formal opinion. Accordingly, any tax advice contained in this website (or any link from it) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be asserted by the Internal Revenue Service. You should seek advice based on your particular circumstances from an independent tax advisor.

Send mail to mhagan@haganlaw.net with questions or comments about this web site.

Copyright © 2007 Martin J. Hagan, One Gateway Center - 8 South; Pittsburgh, PA 15222-1435

Last Updated: 06/29/07