529 Plans and Pennsylvania Inheritance Tax 2016
If an account holder of an out of state 529 Plan account is married at the time of death, then the account holder can save on Pennsylvania Inheritance Tax by appointing the account holder's spouse as the "successor account holder."
529 Plans and Federal Estate Tax"529 Plans" are tuition programs adopted by individual states pursuant to federal law. (26 USC Section 529). Some 529 Plans involve pre-paid tuition accounts. Some 29 plans involve investment accounts. This guide only concerns 529 Plan investment accounts. These accounts provide a tax advantaged way for family members and friends to save for a child's college tuition. When someone deposits money into account with a state's "qualified" (under federal law) 529 Pan, with certain exceptions, the growth on the investment is free from federal free from federal income tax and the account also will be free from federal estate tax.
Most States Have Their Own 529 Plan ProgramsThe federal government set up the federal 529 Plan program, but the program was designed so that each state can administer its own plan. State 529 plans compete with each other. Investors can invest in almost any state's plan, regardless of whether or not they are residents of that state. Some state programs have a higher return on investment. Some states offer advantages to in-state investors. An investor should weigh the advantages and disadvantages to each state's plan. Some investors will weigh return on investment more highly than benefits for in-state investors. Some investors will not.
Pennsylvania's 529 Plan and In-State Pennsylvania InvestorsPennsylvania has its own 529 Plan. Upon the death of an account holder, the Pennsylvania 529 Plan Account is exempted from Pennsylvania Inheritance Tax.
Out-of-State 529 Plans and the Pennsylvania DecedentPennsylvania, however, imposes its Inheritance Tax its residents' out-of-state 529 Plan Accounts. As with other taxable "transfers" at death, Pennsylvania taxes out- of-state 529 Plan Accounts according to the relationship of the "transferee" to the decedent. A 0% tax is imposed on taxable transfers to a spouse. A 4.5% tax is imposed on taxable transfers to lineal descendants. A 12% tax is imposed on taxable transfers to siblings. A 15% tax is imposed on taxable transfers to all others. (Charities are exempt for Pennsylvania Inheritance Tax.)
Opportunity for Estate Planning: Name Your Spouse as Your Out of State 529 Plan Successor1. Most state's 529 Plans provide an account holder with the opportunity to designate a "successor account holder". (The person who opens up the account is the "account holder.")
2. The "successor account holder" is the transferee under Pennsylvania law, not the beneficiary of the account.
3. This is because, despite the death of an account holder, a beneficiary generally is not entitled to control the 529 Plan Account.
4. The "successor account holder", if one has been designated, is entitled to control the 529 Plan account.
5. Therefore, the "successor account holder" is the transferee for purposes of Pennsylvania Inheritance Tax, not the beneficiary.
6. If the account holder's spouse is named the "successor account holder", the Pennsylvania Inheritance imposed is 0%.