Section 529 Plans and Asset Protection

You can rely on a Florida asset protection lawyer at Kramer Green to work diligently to protect your assets from creditors to the greatest extent possible. Florida law provides various mechanisms to shelter assets from creditors so you can keep the wealth you have earned. One such mechanism is the Section 529 account.

Understanding Section 529 Plans

Section 529 plans allow individuals to save money for educational expenses for named beneficiaries. In addition, these qualified tuition programs (QTPs), named for Section 529 of the Internal Revenue Code (IRC) of 1986, have certain tax advantages. Section 529 provides for two QTPs: pre-paid tuition plans offered by states or educational institutions and college savings plans that states operate.

A pre-paid tuition program allows a person to purchase tuition credits for a designated beneficiary at a fixed rate. Even if the tuition credit cost increases in the future, the purchaser does not have to pay the increased cost. Less than a dozen states offer a Section 529 pre-paid tuition program.

On the other hand, a 529 college savings plan provides a method for individuals to save and invest funds for educational expenses for a designated beneficiary. A 529 college savings plan can involve up to three parties: a donor, an account owner, and a beneficiary. In many cases, the donor and the account owner may be the same. All funds in Section 529 college savings plans grow tax-free. As long as the owners of the accounts withdraw the funds and use them for approved educational-related expenses, they pay no taxes on the funds. Most states have their own 529 college savings plans.

Contributions to Section 529 plans are “after-tax” contributions, meaning donors receive no federal income tax benefits. However, many states provide tax breaks on state income taxes if you contribute to state Section 529 college savings plans.

However, if the owners of Section 529 college savings plans withdraw the funds and use them for non-educational expenses, the funds are taxable. Additionally, the plan owners must pay a ten percent penalty on the profit element of the withdrawn funds.

Section 529 Accounts are Exempt from Creditors

Florida Statutes § 222.22(1) fully protects Section 529 accounts from the reach of judgment creditors. This protection remains effective even if the account owner chooses to withdraw the funds to use for non-educational expenses. Although the owner of the funds must pay taxes in that situation, the funds still are not subject to creditor claims. Likewise, suppose the owner of the 529 account withdraws the funds with the intent to use them for a child’s educational expenses and places them in a segregated savings account. In that case, those funds remain exempt from the claims of creditors.

Florida also is one of only a few states in which Section 529 funds are also exempt from creditors of the plan owner. These funds are also exempt from creditors of the donor and the plan’s beneficiary.

Florida law also explicitly protects funds in Section 529 plans in other states, not just in Florida. Therefore, you can own Section 529 plans in multiple states, but all funds would be exempt from the reach of creditors under Florida law. However, depending on the law of the state in which the plans exist, a creditor in that state may have a claim to those funds. As a result, it may be simpler to maintain multiple Section 529 plans in Florida rather than risk funds in an out-of-state plan becoming subject to execution by creditors in another state without such comprehensive protection.

Allow Us to Help You Protect Your Assets Today

An asset protection attorney at Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. is ready to assist you in protecting your personal or business assets from the reach of creditors. We know how hard you have worked to build your personal and business wealth and want to help you preserve it.

As a result, our objective is to take any actions necessary to protect your assets for your and your family’s benefit. Contact our office today at (954) 966-2112 or reach out to us online to schedule a time to discuss your legal issues with our attorneys.

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