SUMMARY OF ADVANTAGES AND DISADVANTAGES OF SECTION 529 PLANS COMPARED TO OTHER TECHNIQUES

    The advantages and disadvantages of Section 529 Plans can be summarized as follows:

    A. ADVANTAGES OF SECTION 529 PLANS

        1. No Income Caps for Section 529 Plans.

    With Section 529 Plans there are no income caps on potential contributors, unlike the eligibility limits applicable to taxpayers who want to claim the higher education income tax deduction or Hope Scholarship and Lifetime Learning tax credits, or who want to use a Coverdell Education Savings Accounts.

    The absence of an income limit on contributors clearly makes Section 529 Plans particularly attractive to higher income families, who also are likely to make above-average use of the savings plans.

        2. No Age Restriction on BENEFICIARY.

    Unlike the Coverdell Educations Saving Account or a PUTMA custodial account, in many states there is no limit on the age of the designated beneficiary. Even an adult seeking higher education later in life can be named as the designated beneficiary. (If age of the beneficiary is an issue, the relevant rules of a particular state’s program should be checked.)

        3. Donor Control Over Funds.

    Purely from an estate planning viewpoint, a Section 529 Plan offers unique advantages to a donor. While a contribution to a Section 529 Plan is treated as a completed gift for gift tax purposes, the owner nevertheless retains the right to recover the funds if the beneficiary does not attend college, the donor needs the funds, or for any other reason. (At the same time, the value of the account will be includable in the gross estate not of the owner, but the beneficiary.) However, the earnings portion of any non-qualified withdrawal will be subject to both regular income tax and the additional 10% tax. Compared to this result, a donor transferring assets to a PUTMA account or other irrevocable arrangement has no right to the return of the assets.

        4. Funds Can Be Used for Education Costs Not Included Under 2503(e).

    Section 2503(e) permits an unlimited gift tax exclusion for gifts made directly to an educational institution if limited to tuition. The scope of § 2503(e) is thus more narrow than a Section 529 Plan’s definition of "qualified higher education expense." Thus, a good strategy for high net worth families may be to use § 2503(e) to pay for the student’s tuition on a current basis, and spend the assets in the Section 529 Plan to pay for other educational expenses, such as room and board, books, and supplies.

        5. Beneficiary Has No Control.

    Generally, the beneficiary has no direct access to or control over the funds in the Section 529 Plan account. The account owner is given exclusive rights to direct the investment and distribution of funds. In any event, the account owner can change the designated beneficiary without the beneficiary’s knowledge or permission.

    B. DISADVANTAGES OF SECTION 529 PLANS