Benefits of 529 Plans

529 Plans have benefits beyond tax-deferred earnings which make them attractive options for educational funding.

I’ve been discussing 529 plans, how they work and their benefits far more frequently with clients than I used to.  You might think that tax-deferred savings is the main benefit, along with tax-free withdrawals for qualifying higher education expenses in 529 plans. However, there are also state tax incentives, such as tax deductions, credits, grants, or exemption from financial aid consideration from in-state schools in certain states.  Forbes’ recent article entitled “7 Benefits You Didn’t Know About 529 College Savings Plans (But Should)” says there are many more advantages to the college savings programs than simple tax benefits.

1) Registered Apprenticeship Programs Qualify. You can make qualified withdrawals from a 529 plan for registered apprenticeship programs. These programs cover a wide range of areas with an average annual salary for those that complete their apprenticeship of $70,000.

2) International Schools Usually Qualify. More than 400 schools outside of the US are considered to be qualified higher education institutions. You can, therefore, make tax-free withdrawals from 529 plans for qualifying expenses at those colleges.

3) Gap Year and College Credit Classes for High School. Some gap year programs have partnered with higher education institutions to qualify for funding from 529 accounts. This includes some international and domestic gap year, outdoor education, study-abroad, wilderness survival, sustainable living trades and art programs. Primary school students over 14 can also use 529 plans for college credit classes, where available.

4) Get Your Money Back if Not Going to College. If your beneficiary meets certain criteria, it’s possible to avoid a 10% penalty and changing the plan from tax-free to tax-deferred. For this to happen, the beneficiary must:

  • Receive a tax-free scholarship or grant
  • Attend a US military academy
  • Die or become disabled; or
  • Get assistance through a qualifying employer-assisted college savings program.

Note that 529 plans are technically revocable. Therefore, you can rescind the gift and pull the assets back into the estate of the account owner. However, there are tax consequences, including tax on earnings plus a 10% penalty tax.

5) Private K–12 Tuition Is Qualified. 529 withdrawals can be used for up to $10,000 of tuition expenses at private K–12 schools. However, other expenses, such as computers, supplies, travel and other costs are not qualified.

6) Pay Off Your Student Loans. If you graduate with some money leftover in a 529 account, it can be used for up to $10,000 in certain student loan repayments.

7) Estate Planning. Contributions to a 529 plan are completed gifts to the beneficiary. These can be “superfunded” for up to $75,000 per beneficiary in a single year, effectively using five years’ worth of annual gift tax exemption up front. For retirees with significant RMDs (required minimum distributions) from qualified accounts, such as 401(k)s and traditional IRAs, the 529 plan offers high contribution limits across multiple beneficiaries, while retaining control of the assets during the lifetime of the account owner. Assets also pass by contract upon death, avoiding probate and estate tax.

7.5) Medicaid Benefit.  I’m going to cheat and add one more.  In Texas, transfers to 529 plans for CERTAIN beneficiaries are exempt as transactions for longterm Medicaid.  As with all Medicaid planning, you would want to do this at the advice of an attorney, but for situations where it fits, it is a very powerful spend down tool, especially where grandchildren are school age.

Reference: Forbes (July 15, 2021) “7 Benefits You Didn’t Know About 529 College Savings Plans (But Should)”

Continue ReadingBenefits of 529 Plans

Value of Hobbies to your Health

Hobbies can greatly enrich our lives as we age, improve our well-being and increase life expectancy.

As we go into Labor Day weekend, I thought it might be nice to focus on a topic that isn’t about work.  It isn’t a task or something you have to do.  Instead, I going to focus on leisure.

Specifically, studies have shown that having hobbies can improve your well-being and even extend life expectancy, which helps lead to enjoyable golden years.  So with that, here are a few hobbies that may have a powerful impact on your health according to Money Talks News’ recent article entitled “7 Hobbies That Help You Live Longer”.

  1. Reading. Stress is a big source of health problems that shorten lives, and reading can provide a ready escape into a new world.  According to a study out of the University of Sussex, reading can decrease your stress levels by 68%. Reading improves your stress after only a few minutes because your mind focuses on what you are reading. This distraction eases the tensions in muscles and the heart.  This is a personal favorite hobby of mine and I would recommend it to anyone, even people who don’t think of themselves as “readers.”
  2. Gardening. A number of studies show that the physical activity of gardening — combined with being in a lush, green atmosphere — can enhance and extend life. People in their 60s with green thumbs decrease their risk of developing dementia by 36%, according to research from Australia.  I couldn’t find the citation for this, but I’ve been told that heart rates will reduce once you are outside in a green area after only 10 minutes.
  3. Cooking. Restaurant and processed foods are no good for your health. They can contribute to life-shortening illnesses, like diabetes and cardiovascular disease. However, people who make meals from scratch are much more apt to eat a healthier diet. The more often you cook at home each week, the higher you’ll tend to score on the U.S. Department of Agriculture’s Healthy Eating Index. University of Washington researchers say: “Home-cooked dinners were associated with greater dietary guideline compliance, without significant increase in food expenditures. By contrast, frequent eating out was associated with higher expenditures and lower compliance.”
  4. Listening to music. Research shows that regularly attending concerts can add years to your life. One study found just 20 minutes of listening can increase your sense of well-being by up to 21%. In particular, concert attendance increases:
  • Feelings of self-worth by 25%
  • Feelings of closeness to others by 25%; and
  • Mental stimulation by 75%.

The study concluded that such positive feelings could increase your lifespan by up to nine years. According to Fagan, “Our research showcases the profound impact gigs have on feelings of health, happiness and well-being — with regular attendance being the key.”

     5.  Volunteering. Helping others is another great hobby to extend your life, but only if your motives are pure. A study published in the journal Health              Psychology found that volunteering extends life, but with a strange caveat, according to the American Psychological Association:

“Volunteers lived longer than people who didn’t volunteer, if they reported altruistic values or a desire for social connections as the main reasons for wanting to volunteer, according to the study. People who said they volunteered for their own personal satisfaction had the same mortality rate four years later as people who did not volunteer at all, according to the study.”

Researchers think that proper motivation is key to getting the most out of volunteering because it buffers volunteers from stressors, like impingement on the volunteer’s time and lack of pay, which are part of doing good works.  I can say anecdotally that as people age and after they retire, sometimes they lack a focus and throw themselves into volunteering.  It isn’t a healthy approach, they are basically recreating their work experiences and the stress that comes with it.

       6.  Walking. This hobby can have a profound impact on your health, and those who take brisk walks might live up to 20 years longer than couch            potatoes, according to a Mayo Clinic study. Again, it’s brisk walking — at least three miles per hour or 100 steps a minute — is required to get the life-extending benefits.

       7.  Owning a pet. A lot of research has found that pet owners enjoy many health benefits from being around their furry friends. For example, a meta-  analysis of studies published between 1950 and 2019 found that dog owners had a 24% risk reduction for death from any cause. The benefit is even more pronounced for seniors with existing heart problems. The study authors believe walking a dog — (see #6) — may play a big role in these improved health outcomes. Another study in the Journal of Vascular and Interventional Neurology found that people who own cats have a reduced risk of death from heart attack or stroke.

Hopefully this weekend you’ll spend time on your hobby, or pick one of these as a new one!  Happy Labor Day!

Reference: Money Talks News (Aug. 20, 2021) “7 Hobbies That Help You Live Longer”

Continue ReadingValue of Hobbies to your Health

Which Powers should a Power of Attorney Include?

Most clients have at least heard of powers of attorney (POA), and I find that many people with an existing estate plan have one.  However, I find the biggest problem with powers of attorney is not the lack of one, but having one without sufficient powers or provisions to work well for the client.  For that reason, you need to know powerful this document is and identify its limits. A recent article from Forbes titled “4 Power of Attorney Clauses You Need To Focus On” addresses many key provisions to consider in the power of attorney.

First, as a primer, the POA is a document that assigns decision making to another person during your life.  People often do this for when they become incapacitated in life, but also for convenience, such as a spouse having authority to interact with a bank, signing at a remote real estate closing and so on.

The agent acting under the authority of your POA only controls assets in your name. Assets in a trust are not owned by you, so your agent can’t access them. The trustee (you or a successor trustee, if you are incapacitated) appointed in your trust document would have control of the trust and its assets.  Also, POAs are for lifetime delegation of decision-making, so they cease to be effective when you die.

If you want more background on what they are, see this classic blog.  https://www.galliganmanning.com/power-of-attorney-planning-for-incapacity/

With all of that said, here are three key provisions to consider within your POA to make it effective for your circumstances.

Determine gifting parameters. Will your agent be authorized to make gifts? Depending upon your estate, you may want your agent to be able to make gifts, which is useful if you want to reduce estate taxes or if you’ll need to apply for government benefits in the future. You can also give directions as to who gets gifts and how much.

In recent years I’ve discussed the possibility of extensive gifting quite a lot so that wealthier clients can consider making large gifts for estate tax purposes. In elder law cases this is one of the most key provisions in a POA as it provides options for long term care planning.

Can the POA agent change beneficiary designations? Chances are a lot of your assets will pass to loved ones through a beneficiary designation: life insurance, investment, retirement accounts, etc. Banks tend to build products that provide for this, which is good, but does raise issues within your estate plan.  Do you want your POA agent to have the ability to change these? In most states, Texas included, your POA needs to expressly provide for this power.  So, it is important to consider if you will need this power to adequately control assets in the future.

Can the POA create or amend a trust? Depending upon your circumstances, you may or may not want your POA to have the ability to create or make changes to trusts. This would allow the POA to change the terms of the trust, and potentially beneficiaries depending on the terms of the POA.  It is also worth considering this if you’ll need long term care in the future as these provisions assist with qualified income trusts which are helpful in Medicaid planning.

The POA is a more powerful document than people think, and that is especially true with powers crafted to fit your wishes and needs. Downloading a POA and hoping for the best can undo a lifetime of financial and estate planning. It’s best to have a POA created that is uniquely drafted for your family and your situation.

Reference: Forbes (July 19, 2021) “4 Power of Attorney Clauses You Need To Focus On”

Continue ReadingWhich Powers should a Power of Attorney Include?