I received this panicked email from a client just the other day:

“I was looking at our 529 and didn’t realize they are subject to gift tax. We have now put over $32,000 into one child’s account for the year and everything over $15,000 will be taxed at our tax rate. Is there any way to transfer the money to the other kids’ accounts to avoid paying taxes?”

Although there are pieces of the client’s statement that are accurate, there are also some estate and gift tax rules that I quickly reviewed with the client. In case you were wondering:

The gift tax exclusion for 2018 is $15,000. This means that any person can gift up to that amount to any other individual without incurring any gift taxes and without having to file a gift tax return. If you are married, then effectively the amount can be doubled ($15,000 each for a total of $30,000 to any individual). When contributing to a 529 plan, the IRS doesn’t impose annual contribution limits like they do in 401(k) plans or IRAs; however, the contributions (typically from a parent or grandparent) are considered gifts. Therefore, the same annual gifting limits apply…

…except there is a way you can contribute more than this limit without reducing your lifetime exclusion (currently at $11.2 million per individual in 2018). The IRS allows you to make a 5-year election and aggregate your gifts in a shorter time period while the amount is pro-rated over the next five years (as long as you contribute at least $15,000). For example, if you deposit $50,000 this year it will be applied as $10,000 each year, leaving you with a $5,000 unused exclusion. Using this strategy, a married couple could put up to $150,000 into a college savings account this year without gift tax implications!

There are a few things to be aware of when utilizing this strategy. The first is that each individual who makes a contribution above the $15,000 limit to a single individual in 2018 will need to file a Form 709 when completing their taxes—there is no joint gift-tax return so each spouse would have to file separately. Don’t worry – this doesn’t mean you will owe taxes. It just means you have to file the return to track your gifting. Secondly, if the donor passes away during the proceeding five years, then the amount remaining would be added back to the donor’s estate. Finally, even though there are not annual limits on contribution amounts into a 529 plan, there are maximum aggregate limits, which vary by state. 529 plan balances cannot exceed the beneficiary’s expected cost of qualified educational expenses—somewhere between $235,000 and $520,000.

The best feature of 529 plans is that the asset leaves your estate for tax purposes but you (assuming you are the owner of the account—and why wouldn’t you be if you are putting all of the money into it?!) maintain control of the money. You will be able to oversee the investments and use of the account, making sure that your wishes are carried out. And with the most recent changes in the tax law, 529 plans can be used for K-12 tuition, making the account more flexible than ever. Additionally, one feature many are not aware of is the ability to rename the beneficiary of the account. In the event you were to “overfund” the account for your oldest child, for example, you can rename the beneficiary to a younger child (or even another relative for that matter) to provide for their educational expenses.