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529 Sponsors Tout Estate-Planning Role to Affluent Investors


High-net-worth clients are in demand these days and are being targeted by some unlikely sources. Associated most with separately managed accounts and hedge funds, affluent investors are now being courted by 529 plan sponsors.

Sponsors are now promoting the vehicle, primarily known as a college savings tool, as a tax-efficient way the wealthy can transfer a portion of their estate to their heirs. The big bucks of high-net-worth clients could help heal some of the major problems the 529 industry has been facing as well, such as low account balances and profitability issues.

Assets in 529 plans more than doubled last year, reaching $18.5 billion from $8.5 billion in 2001, according to the Investment Company Institute. Even more recently, assets reached nearly $26 billion at the close of the second quarter, according to Financial Research Corp. But that hasn't solved the problem of low account balances, which averaged $6,400 at the end of last year, according to the ICI.

In an attempt to counteract the pitfalls of such low account balances, some providers have looked to the affluent as a solution. While 529s do not enable investors a way to avoid paying taxes on the full scope of their estate transfer, they will allow them to transfer significant chunks of cash to inheritors without having to pay an estate tax. However, the funds must be used for college or related expenses such as housing and books.

Joseph F. Hurley, chief executive officer of savingforcollege.com of Pittsford, N.Y., said that estate planning is prevalent in 529s and is growing in popularity. "Certainly the use of 529 plans as a financial product and a marketing tool for high-net-worth clients has accelerated," Hurley said. "The fact is that these accounts can stay open for a very long time and can help generations save for college. There are lots of wealthy grandparents with lots of grandkids putting hundreds of thousands of dollars, if not millions, away in plans," he said.

The federal government's gifting allowance is $11,000 a year, but in the 529 plan, investors are allowed to gift up to five year's worth at once, for a total of $55,000 per giver. If the estate is comprised of two people, such as a husband and wife, each person is allowed to gift $55,000, so that could increase the total to $110,000.

And it doesn't end there. That total could become quite a bit higher if there are numerous heirs. Ten grandchildren could rack up a total of $1.1 million in non-taxable gifts from wealthy grandparents.

Bruce Harrington, vice president and 529 plan director at MFS Investment Management, said that approximately 20% of all the assets in his firm's 529 plans comes from high-net-worth clients exercising estate planning. Harrington said he would like to see that number increase to the 30% to 35% range, despite that class of investor only representing a total of 5% to 7% of the overall number of accounts.

MFS has some specific initiatives targeting the group, including flyers promoting the estate-planning qualities of the product. The firm is also developing a kit that will walk investors through the steps of gifting money in the plan. However, Harrington said the big gifting season is the fall, when school is back in session from its summer break.

MFS is in the 529 business in two ways, he said. The firm is the investment manager for eight plans across the country totaling $150 million in assets. It is also the program manager for the state of Oregon, which has about $50 million in assets.

There is a lot of room for these plans to capture some of the wealth of high-net-worth individuals. A recent study by Charles Schwab conducted by Harris Interactive, indicated that many affluent Americans over the age of 45 intend to leave their estate to their children, but very few lack a substantial plan to preserve their wealth. In fact, 75% have not made any plans, the survey found.

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