529 superfunding and asset protection implications

[Doctor Dad]

Hello all,

I plan to superfund 2 529's in the near future.  I am a big believer in doing the "heavy lifting" of investing early on, and with very young children at home, it would feel great to already be done saving for their college.  FYI I am part of a high earning couple and this endeavor would not be in place of other retirement account savings (already maxing out).

One reason I am attracted to getting the 529's out of the way is that it seems, from what I can read, that this money is reasonably well protected as an asset.  As a two physician couple, it would be comforting to know that nobody could ever get to that money, even if one of us were sued.

One question I have though, is if 529 money would be protected from a malpractice lawsuit, or is it just protected from other types of suits or bankruptcy.  Furthermore, are there certain states which offer better protection (i.e. I am currently contributing to my home state for tax purposes, but would consider super funding in a separate state if the money was better protected).

Thanks for any info!

[FIREshrink]

My personal opinion: no one knows for sure. Since substantial 529 investments are almost exclusively the province of the very wealthy, I'd be unsurprised if there's not a single case of an owner of a substantial 529 subsequently declaring bankruptcy and trying to protect those assets. These details of 529 law are largely unsettled because they haven't been around long enough to be tested.

In my non-legal opinion, a 529 contribution is considered a completed gift and thus would not be at risk to your creditors. Would it be at risk to your beneficiary's creditors? See paragraph 1 for my opinion about that.

But this is almost a moot point, because if you do not contribute to the 529, what are you going to do with the money? For most of us the answer is "taxable" and certainly a taxable account has no protection from creditors; so on that count a 529 could be no worse.

[ReFinDoc]

In asset protection, the last thing you want to do is declare bankruptcy. If you super fund a 529, then you are obligated to use the money only for higher education expenses, which is quite a restriction. A taxable brokerage fund can be partially protected in an LP or LLC, possibly within an insurance policy. Stuff as much money as possible  into 401ks and IRAs.

Have  adequate malpractice and umbrella policies. Get a HELOC to protect Home Equity. Consider paying down your mortgage with excess funds to your State's Homestead Exemption.

Avoid Trusts for asset protection.

No fraudulent transfers.

You are being too smart by half.

[q-school]

FIREshrink wrote:

My personal opinion: no one knows for sure. Since substantial 529 investments are almost exclusively the province of the very wealthy, I’d be unsurprised if there’s not a single case of an owner of a substantial 529 subsequently declaring bankruptcy and trying to protect those assets. These details of 529 law are largely unsettled because they haven’t been around long enough to be tested.

In my non-legal opinion, a 529 contribution is considered a completed gift and thus would not be at risk to your creditors. Would it be at risk to your beneficiary’s creditors? See paragraph 1 for my opinion about that.

But this is almost a moot point, because if you do not contribute to the 529, what are you going to do with the money? For most of us the answer is “taxable” and certainly a taxable account has no protection from creditors; so on that count a 529 could be no worse.

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also in a completely non legal and non knowledgable opinion, i have a question.  you can get the money back from a 529 with a penalty if you don't use it for education.  so i don't know if it is the same as a completed gift?

 

[Hatton]

Do not lose any sleep over a malpractice case settling for more than the limits of your insurance.  If you lose a case at trial the plaintiff will take your several million policy amount not whatever the jury awards in almost all cases.

[jfoxcpacfp]

q-school wrote:

also in a completely non legal and non knowledgable opinion, i have a question.  you can get the money back from a 529 with a penalty if you don’t use it for education.  so i don’t know if it is the same as a completed gift?

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That is a good question! It is considered a completed gift by the IRS (you must file gift tax returns above $14k/year) but the "donee" can relinquish the money back to you. Kind of like your daughter agreeing to give you back the money you had gifted her in exchange for a 10% penalty, but you have a structured process for retrieving your 529 funds. But you're right, this kind of "gift" is an exception to the general rules.

[Craigy]

If you have a particular need or concern for asset protection, you need to be speaking with a qualified attorney in your state, likely an attorney who specializes in estate planning.  The intricacies of asset protection vary incredibly from state to state so this is a very specific question that only specific qualified people can adequately answer for you.

In general though, yeah, maintain as much malpractice and umbrella insurance as you can, stuff your retirement accounts full, etc.  But nothing is guaranteed.

[childay]

Do you get a state tax deduction for contributions in your state?

[kuma1212]

I'm also considering super funding my 2 kids 529 plans.  I'm currently still weighing the pros and cons and trying to determine if I actually have the funds to do so.  It may end up being a partial superfund.  This may allow me to also take advantage of my state tax deduction, although I'm looking into the details of the state tax laws as well.

[Faithful Steward]

Doctor Dad wrote:

One question I have though, is if 529 money would be protected from a malpractice lawsuit, or is it just protected from other types of suits or bankruptcy.  Furthermore, are there certain states which offer better protection (i.e. I am currently contributing to my home state for tax purposes, but would consider super funding in a separate state if the money was better protected).

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Asset protection for 529 Plans varies state to state. Here's a link to a listing of each state's protections, albeit it's 2 years old and some state's laws may have changed. You really should consult an attorney in your state of residence.

http://advisor.morningstar.com/uploaded/images/529_Table.pdf

 

[G]

Resurrecting this thread, for "superfunding" issue as opposed to "asset protection" issue.

My kid is 8, already has some money in a 529.  Any problem with superfunding in that situation?  I assume the amount is 75k (per parent) this year?

In the next 5 years, if the gift limits rise, can you put in more?

If you superfunded, did you file a 709?

[jfoxcpacfp]

Your questions, in order

• If the child has an account already open, no problem with superfunding $15k/yr for 5 years  as long as you have not already made a contribution for that period.


• You might lose some state tax benefits that are available for annual contributions by superfunding.


• Yes.


• You should file a 709 unless you do not give your children any other gifts during those 5 years (birthday, Christmas, etc.) It's quite easy to file and it protects you. The SOL for an unfiled 706 never closes.

[csbest]

If you anticipate having kids, but don't have any yet, can you still open and deposit money into a 529 in an effort to decrease taxable income?

[MPMD]

csbest wrote:

If you anticipate having kids, but don’t have any yet, can you still open and deposit money into a 529 in an effort to decrease taxable income?

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It's my understanding that you can, you just name someone else the bene and then change when you have kids.

529 really only provide state income tax breaks and so at most you're talking about a few thousand a year and that's if you put a boatload of money into it.

I would argue that you would always be able to find something better to do with your money than fund a 529 for an unborn child.

[jfoxcpacfp]

csbest wrote:

If you anticipate having kids, but don’t have any yet, can you still open and deposit money into a 529 in an effort to decrease taxable income?

Click to expand...

You should not fund a 529 if you have no kids solely to decrease taxable income.

1. There is no deduction at the federal level.


2. There may be no deduction at the state level. If there is a deduction or tax credit opportunity, you will most likely save only a few hundred dollars.

As @MPMD said, there are many better uses for your money. Putting tax breaks before growth of net worth is reversing proper priorities.