Advanced Marketing Forum Question

Frontloading 529 Plan Contributions

Question:
I know a client can “front-load” a 529 plan by putting $55,000 in the first year (thus using up 5 years of annual gifts).

Question: Do prior year contributions affect the use of a $55,000 contribution this year? Assume that in year one, client contributes $5,000. In year two, $6,000. Can the client contribute the $55,000 in year 3 without gift tax consequence? Or is the front loading limited only to the initial 529 contribution?

Reply #1:
Using five years of "annual gift tax exclusions" in one year can be done prospectively in any year of a 529 Plan. Regular gifts from prior years will not have an impact on this approach.

So, a gift in year 1 of $5,000; year 2 a gift of $6,000, followed in year 3 by $55,000 ($11,000 times 5 years) for years 3 through 7 will work.

"Front loading" is not limited to the first plan year.

Richard L. Olewnik, JD,CLU,ChFC
American Skandia
Advanced Client Solutions Team

Reply #2:
The $55,000 only applies to the 5-year period starting with the year of the gift and the 4 years immediately following (ie: No lookback).

One important note: Any gift exceeding the annual exclusion of $11,000 is deemed to be spread ratably over the 5 year period. For instance, a gift of $30,000 will be treated as gifts of $6,000/year over five years. This means you can't "bunch" gifts into a period shorter than the 5 year period even if you've gifted less than $55,000. It's all or nothing. A gift over the annual exclusion is either treated as a gift in one taxable year or spread ratably over 5 years. Any gifts in the next 5 years, must recognize that a portion of the annual exclusion may already be used up.

Matt Campbell
Investment Partners, LTD

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