0 ©2014 Legg Mason Investor Services, LLC, a Legg Mason, Inc. subsidiary. Member FINRA, SIPC College Savings Plans: Estate & Gift Tax Planning Date Presented by: Name Title

1 COLLEGE SAVINGS PLANS: ESTATE PLANNING  529 Plan Basics  Grandparent Benefits of 529 Plans  Estate Tax Exemption  Trust Interaction with 529 Plans  Important Resources  Questions? Agenda

2 COLLEGE SAVINGS PLANS: ESTATE PLANNING What is a 529 Plan? Named after the federal tax code by which they are governed, 529 college savings plans are tax-favored, qualified tuition programs administered by each state, for the purpose of helping families save for college nationwide and, in many cases, overseas as well.

3 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Administered – By individual state  Maintained – By “program managers” (typically mutual fund firms)  Purchased – Sold through advisors or directly purchased by account owners (online or paper application)  Investments – Offers the availability to invest in various investment options, typically age-based and individual fund options on a tax-advantaged basis  Qualified Distributions – Qualified educational expenses at any higher educational institution which participates in the U.S. Department of Education’s Federal Student Financial Aid (FAFSA) program 529 Plan Basics – Overview Source: CollegeInvest, IRS ( MSRB (

4 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Account Owner:  Must be a U.S. resident & have a Social Security or federal tax ID number  No age or income restrictions on owner or beneficiary  Maintains full control of the account, including distributions & investment choices  A successor account owner may be named to take over ownership of the account in the event of the account owner’s death  Beneficiary:  Does not need to be living in the U.S. at time of account opening, but must have a valid Social Security or Federal Tax ID number  May be changed to another “member of the family” of the beneficiary at any time without penalty  Accounts may be held without a beneficiary in the case of scholarship accounts with 501c(3) organizations as owners Who Can Participate?

5 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Beneficiary  Account owners may change the beneficiary. No 10% penalty or adverse income tax consequences if the new beneficiary is a “member of the family” of the current beneficiary: Changing a Beneficiary  Natural or legally adopted children  Parents or ancestors of parents  Siblings or stepsiblings  Stepchildren  Stepparents  First cousins  Nieces or nephews  Aunts or uncles  The spouse of the original beneficiary or the spouse of any of those listed above, excluding first cousins, also qualifies as a “family member. ”  If the new beneficiary is not a “family member, ” the change is a non-qualified withdrawal, subject to federal and state income tax (including possible recapture of state deductions) on account earnings and may be subject to the 10% federal penalty.

6 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Key features of combining the capabilities of estate planning with 529s  Expand ability to support high net worth clients  Use special gift tax exclusion: Leverage $14,000 annual gift tax exclusion 5-year funding in one calendar year  Maximize capabilities of trusts with 529s  Reduce assets subject to $5.34 million per person estate and gift tax lifetime exemption. Integrating Estate Planning with 529s

7 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Direct Payments for Tuition  Unlimited direct payments to the educational institution  Issues:  Mortality risk If donor dies before direct payment, the assets are subject to estate tax  Tuition only Not for books, supplies, dorm fees, meal plan, computers or similar expenses  Financial aid impact  Must be a student Gifting Without a 529 Source: IRS ( IRS Publication US Code 2011 Title 26 Subtitle B Chapter 12 Subchapter A, Section 2503, page 2444); page in section: 34 CFR 673.5(c)(1)(xiii));

8 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Reduce Exposure to Estate Tax  Considered completed gifts, not subject to estate tax and removes mortality risk  Use for All Qualified Expenses  Expands usage of direct payment from tuition to other qualified expenses (books, supplies, housing)  Financial Aid Impact  Assets don’t impact, but distributions increase expected family contribution in financial aid calculation by up to 50% the following year Grandparent Benefits of 529 Plans Source: IRS (

9 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Retained Control  Ensure assets are spent on education as assets are revocable  Depending on family situations, changes in beneficiaries can be made  Unlimited Number of Beneficiaries  No Expiration Date  529 assets are revocable and tax-advantaged  Solution for Required Minimum Distributions  Clients who don’t need their required minimum distributions can reinvest those assets in 529 plans  Gain State Tax Deductions or Credits Grandparent Benefits of 529 Plans Source: IRS (

10 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Implications for 529s  Certain states offer state income tax deductions for contributions to 529 plans In Colorado, the accountholder receives a dollar-for-dollar refundable deduction up to the resident’s taxable income level. In Utah, the accountholder receives a 5% state income tax credit up to $93 per beneficiary for single taxpayers. Amount Increases to $186 for married couple, and increases each year.  Contributing to 529 plans may take the tax payment due down to zero. Gain State Tax Deductions and Credits Source: IRS ( UESP (

11 COLLEGE SAVINGS PLANS: ESTATE PLANNING Estate Tax Planning with 529s  $5.34 million lifetime gift exemption from estate tax as of 2014 for individual  Estate tax rate for estates valued over $5.34 million increased from 36% in 2012 to 41% in 2013  Exemption indexed by inflation annually  Two important goals combined  Potentially reduce estate tax burden with 529 plans  Provide an educational legacy Source: IRS (

12 COLLEGE SAVINGS PLANS: ESTATE PLANNING 50-Year History of Estate Tax Rates Sources: IRS ( IRS (

13 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Potential gift/GST tax consequences:  A contribution to a 529 plan is a completed gift from donor to beneficiary eligible for the $14,000 gift tax annual exclusion  When the beneficiary is two or more generations younger than donor, the annual exclusion also applies to the generation-skipping transfer (GST) tax  No gift/GST tax consequences:  A change of the beneficiary to another member of the family, or  A transfer to an account for another member of the family  Exception: If the new beneficiary is one or more generations below the old beneficiary, the value of the account at the time of change/transfer is treated as a gift from old beneficiary to new beneficiary. Gift & Generation-Skipping Taxes Source: IRS (

14 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Federal Gift Exclusions  Gift Tax Exclusion: A parent may give up to $14,000 per year without paying gift tax. The amount of $14,000 is as of 2014, and may change over time. Gift Tax Exclusion Source: IRS (

15 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Federal Gift Exclusions  Generation-Skipping Transfer Tax Exclusion: A grandparent may make taxable gifts up to $5.34 million over the course of his/her lifetime, including gifts to grandchildren and great-grandchildren, without paying gift, estate, or generation-skipping tax. Generation-Skipping Tax Exclusion Source: IRS (

16 COLLEGE SAVINGS PLANS: ESTATE PLANNING 50-Year History of Estate Tax Exemption Sources: IRS ( IRS (

17 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Exemption  Annual exclusion for gifts  Up to $14,000 for Individual Gift Tax Exclusion  $28,000 if married  Gift Splitting  529 Plans allow a lump sum contribution in an amount equal to five times the federal annual gift tax exclusion  Pares down estate, which reduces potential estate tax liabilities  Considered completed gift  Eliminates annual income tax that otherwise would be paid on investment earnings  Value of the account will be included in the beneficiary’s estate  Tax-free growth outside of account owner’s estate and preserving more of estate for loved ones after death Gift Tax Provision: High Limits Source: IRS (

18 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Forward gifted amounts inside a 529 are not considered part of an estate  Forward gifted amounts, with the exception of any earnings, will be counted as part of the estate if the contributor passes away within the 5-year timeframe. Example 1: Married grandparents contribute $280,000 in the year 2013 to two grandchild’s 529 accounts, with $140,000 going to each account. The grandparents both pass away in 2016: $224,000 for years 2013, 2014, 2015 and 2016 are excluded from any estate taxation, and $56,000 for year 2017 will be subject to estate taxation.  Five-year forward gifting provision  Up to $70,000 ($140,000 per couple) per beneficiary in a single year, with the special five-year forward gifting provision Forward Gifting/Estate Tax Benefits Source: IRS (

19 COLLEGE SAVINGS PLANS: ESTATE PLANNING Forward Gifting: Example 1. Recipient Year Amount Gift Tax Exclusion Used Grandchild : $140,000 $28,000 Grandchild : $140,000 $28,000 Removed from Estate$56,000 Grandparents Gifting to Two Grandchildren; Death of Giftor

20 COLLEGE SAVINGS PLANS: ESTATE PLANNING Forward Gifting: Example 2 Donor Contributor Year Amount Gift Tax Exclusion Used Grandfather 2013: $70,000 $14,000 Grandmother 2013: $14,000 $14,000 Grandmother 2014: $46,000 $9,200 Grandfather 2018: $70,000 $14,000 Total Contributed Per Year$28,000$23,200 $14,000 Total Contribution Over 10 Years: $200,000

21 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Advantages of Selecting 529s Over Trusts  Advantages of Liquidating Trusts to Fund a 529?  Advantages of Keeping Money in Trusts  Advantages of Trust-Owned 529 Plan Trust Interaction with 529 Plans

22 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Greater control of assets  Asset growth & qualified withdrawals are tax free  Investment income not subject to federal “kiddie tax”  State tax advantages in some states.  No time/age restrictions (unless imposed by plan)  Counted as parent’s asset for financial aid purposes (assessed by college at lower parental asset rate of 5.64% than a student’s non-529 asset rate of 20%)  Owner may make non-qualified withdrawals (subject to tax and 10% federal penalty)  Less expensive to set up and maintain Advantages of Selecting 529s Over Trusts Source: FINRA IRS (

23 COLLEGE SAVINGS PLANS: ESTATE PLANNING Pros:  529 plan assets remain irrevocable  Avoid having to pay taxes on the earnings year-over-year  Increase potential of qualifying for financial aid Cons:  Beneficiary will still assume control when reaching 18 or 21  529 assets transferred from Trust can’t be transferred to a new beneficiary  529 plans can only be funded in cash  Assets in trusts need to be sold prior to transferring  Taxable event: capital gains will be taxed Advantages of Liquidating UGMA/UTMA to Fund a 529? Source: IRS( FINRA

24 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Investment Flexibility  Trusts are not limited to a lineup of available options  Contribution Flexibility  Trusts don’t have a maximum contribution limit  Qualified Usage  Use of assets are not restricted to qualified education expenses However, assets must be used for benefit of the child  Can be used for non-qualified education expenses Travel to and from college, dorm room supplies, medical expenses, etc. Advantages of Keeping Money in Trusts Source: IRS (

25 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Setting Up a 529 Plan Account with the Client’s Trust as the Account Owner  Eliminates any year-over-year taxes on earnings Helps to offset the expenses of the trust (accounting costs, attorney fees, custody charges, court fees, etc.) Especially beneficial for trusts, which have compressed tax brackets  Maximizes the after-tax return on assets in trust intended for education  Simplifies the trust’s investment policy, which lowers annual administrative fees  Helps to ensure assets are ultimately used for higher education Advantages of Trust-Owned 529 Plans Source: IRS Form 1041-ES (

26 COLLEGE SAVINGS PLANS: ESTATE PLANNING Income Tax Rate Schedule for Estates and Trusts OverBut Not OverThe Tax Is Of the Amount Over $0$2,500$0 + 15%$0 $2,500$5,800$ %$2,500 $5,800$8,900$1, %$5,800 $8,900$12,150$2, %$8,900 $12,150— $3, % 12,150 Tax Rate Schedule Source: IRS (

27 COLLEGE SAVINGS PLANS: ESTATE PLANNING  Resources to Learn More  Questions?  Important Disclosure Additional Information

28 COLLEGE SAVINGS PLANS: ESTATE PLANNING  IRS Publication 970: Tax Benefits for Education  IRS Tax Topics  IRS Tax Tips   FINRA.org “Smart Saving for College – Better Buy Degrees”   Resources to Learn More

29 COLLEGE SAVINGS PLANS: ESTATE PLANNING  IRS Publication 929: Children and Dependents  IRS Publication 950: Estate and Gift Taxes  IRS Announcement ( Newsroom/Annual- Inflation-Adjustments-for-2013)  MSRB Education Center ( EducationCenter/529Plans.aspx)  eFile.com on Exclusions ( tax/#exclusions)  H.R. 529 ( Resources to Learn More

30 COLLEGE SAVINGS PLANS: ESTATE PLANNING  vol3-sec673-5.pdf  page in section: 34 CFR 673.5(c)(1)(xiii))  5/?_r=0  directly-to-avoid-gift-taxes Resources to Learn More

31 COLLEGE SAVINGS PLANS: ESTATE PLANNING Estate & Gift Tax Planning Questions?

32 COLLEGE SAVINGS PLANS: ESTATE PLANNING Important Disclosure An investor should consider the Program’s investment objectives, risks, charges and expenses before investing. The Program Disclosure Statement at scholars-choice.com, which contains more information, should be read carefully before investing. If an investor and/or an investor’s beneficiary are not Colorado taxpayers, they should consider before investing whether their home states offer 529 plans that provide state tax and other benefits only available to state taxpayers investing in such plans. Investments in the Scholars Choice College Savings Program are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed by the State of Colorado, CollegeInvest, QS Legg Mason Global Asset Allocation, LLC, Legg Mason Investor Services, LLC, or Legg Mason, Inc. or its affiliates and are subject to investment risks, including loss of principal amount invested. Legg Mason, Inc., its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax- related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Scholars Choice is a registered service mark of CollegeInvest. CollegeInvest and the CollegeInvest logo are registered trademarks. Administered and issued by CollegeInvest, State of Colorado. QS Legg Mason Global Asset Allocation, LLC is the Investment Manager and Legg Mason Investor Services, LLC is the primary distributor of interests in the Program; together they serve as Manager of the Program. QS Legg Mason Global Asset Allocation and Legg Mason Investor Services, LLC are Legg Mason, Inc. affiliates. QS Legg Mason Global Asset Allocation (QS LMGAA) is part of the combined QS Investors investment platform, which is comprised of QS Investors, LLC, QS Batterymarch Financial Management, Inc. and QS LMGAA. ©2014 Legg Mason Investor Services, LLC. Member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc. scholars-choice.com FN