Named after Internal Revenue Code Section 529, 529 accounts are typically set up to earmark funds for the higher education of a grandchild or other family member. Funds placed in a 529 account are typically are intended to go toward college tuition, room and board and other expenses. As of 2013, you can deposit up to $14,000 per year ($28,000 for a married couple) into a 529 account without having to pay a gift tax. You also have the option of depositing up to $65,000 (or $130,000 for a married couple) during the first year of a five-year period, provided you make no additional deposits during this timeframe.
Funds in a 529 account are usually invested in the form of mutual funds, and the earnings are tax-free as long as the funds are used as intended. If the funds are used for any purpose other than higher education, the earnings are then taxed as ordinary income and you will be assessed a 10 percent penalty on investment gains. A qualified elder law attorney can explain in greater detail how 529 accounts work and help you determine if such an account would meet your estate planning needs.
