529 For my child: who should be the "owner" - me, my wife, or both of us

[LizOB]

Something to consider: some states (like VA) give you a state tax break up to a cap.... per account. So my husband and I each have an account for our son, which doubles our state tax deduction. I would look into whether your state does this also

[spiritrider]

q-school wrote:

What if you pay your kids college and then later on use the leftovers on yourself. What if there is still some left, can that be transferred to grandchild without the generation skip? As if you gave it to the grandchild originally. Say fifteen years have passed since child last used it and you reclaimed the money. Also,Do you pay tax if you reclaim the money for yourself? I’m assuming no.

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Any change of beneficiary to a lower generation is subject to gift/GST reporting rules. This means you can transfer 5X annual exclusion every five years each from the account owner and spouse. There will not be any gift taxes unless/until you exceed the lifetime gift/estate tax exclusion. Now $11.2M with the tax reform.

Any non-qualified distribution will be subject a 10% penalty and ordinary income taxes on the earnings. This will be assessed on whoever receives the distribution and their marginal tax rate.

If you are not going to transfer/rollover the excess funds to another beneficiary, it is probably best for the current beneficiary to take the non-qualified distributions, because their marginal tax rate will likely be lower.

 

[q-school]

What if you pay your kids college and then later on use the leftovers on yourself. What if there is still some left, can that be transferred to grandchild without the generation skip? As if you gave it to the grandchild originally. Say fifteen years have passed since child last used it and you reclaimed the money. Also,Do you pay tax if you reclaim the money for yourself? I’m assuming no.

[spiritrider]

The easy one. A 529 can not be a joint account.

ENT doc: already gave you a reference to 529 asset protection.

There is no practical operational difference whichever parent is the account owner. However, the account owner can make a non-qualified withdrawal of the entire account for their benefit.

So which do you worry about more. Asset protection or your wife running off to mexico with the 529 and the pool boy. If you are worried about both have each of you open an account and contribute 1/2 equally.

My suggestion is to have adequate malpractice/umbrella insurance and not worry about things beyond your control.

[HeyAnesthesia]

This is an important post that strayed a bit off topic. Does anyone have any insight into the original question (who should be the owner of the 529?).

[ENT Doc]

Ok, that was my take after reading that article and from inquiring about this on Bogleheads.  It still seems like an efficient wealth transfer scheme though.  Say, for example, you have 140K still left over.  Presumably 30 years or so from now, a lot of that money will be from growth within the fund, not your original gift.  By transferring all of that tax-free growth over with no gift tax impairment in a 5 year lump sum you're gifting in the most tax-efficient manner possible.  Granted, if your goal is to reduce the size of your estate through gifting this doesn't help a lot.  But it helps you live a more comfortable life in retirement and helps your child get started out in their life without having to gift as much each year.  I'm not a fan of economic outpatient care, but I'm also not a fan of the first degree price discrimination being perpetrated by our colleges and universities.

[spiritrider]

It is really worse than just the IRS being unclear about who the new gift is from. They actually proposed two conflicting regulations with different people identified a the source of the gift.

1. In 1998, they proposed that since it was a completed gift to the Designated Beneficiary (DB). The rollover to the new DB should be considered a gift from the current DB to the new DB.


2. In 2008 they proposed that since the DB has no control over the account and may even still be a minor. The rollover to the new DB should be considered a gift from the Account Owner (AO) to the new DB

IRS never finalized either proposed regulations, but most professionals are inclined to recommend you follow the latest proposed regulations. Although many question how you can be subject to gift tax regulations when it is not considered part of your estate.

 

[jfoxcpacfp]

ENT Doc wrote:

Interesting point about the trust.  Will definitely look into that.  But even if there are excess funds in the scenario I described, I could still gift the remaining 529 money in my son’s account to his son’s 529 without incurring any gift tax, provided I stayed under the exclusion limit, right?  It doesn’t make sense that I could, as a grandfather, gift 529 funds to my grandchild or pay his tuition outright without incurring any tax liability but that I wouldn’t be able to roll those 529 funds into a grandchild’s fund (again, provided I’m not going over the exclusion limits).  Thoughts?

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According to the article I linked above:

"If the new beneficiary is a member of the family of the old beneficiary but is in a later generation-for example, if the beneficiary is changed from a child to a grandchild-then the change is treated as a gift. The IRS is unclear at this point whether the gift is from the old beneficiary or from the account owner to the new beneficiary. Whoever is deemed to be making the gift could apply his or her gift-tax annual exclusions and even make the five-year election to mitigate the tax consequences of the gift."

[ENT Doc]

Interesting point about the trust.  Will definitely look into that.  But even if there are excess funds in the scenario I described, I could still gift the remaining 529 money in my son's account to his son's 529 without incurring any gift tax, provided I stayed under the exclusion limit, right?  It doesn't make sense that I could, as a grandfather, gift 529 funds to my grandchild or pay his tuition outright without incurring any tax liability but that I wouldn't be able to roll those 529 funds into a grandchild's fund (again, provided I'm not going over the exclusion limits).  Thoughts?

[spiritrider]

TheGipper wrote:

This does seem to push the limits on the step doctrine, as I would have essentially transferred the 529 $ to my grandkids in two steps.

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Just because something ends up being done in two steps does not make it subject to the step transaction doctrine.

Contributing to a 529 with your son as beneficiary and later transferring the 529 balance to your grandchildren couldn't even remotely be considered a step transaction. The fact that you have to claim new gift tax exclusions or loss of lifetime exclusion and possible gift tax liability demonstrates it can not be any attempt at duplicitous tax avoidance.

 

[TheGipper]

Thank you! I'll bookmark that magazine.

I had read that article before which had alerted me that I would have to claim split spousal gifts on form 709 to give 28k to 529 in one year (not automatically split between each spousal gift allowance)

It's still a little unclear how the final step will play out, but sounds like no matter who is deemed the gift giver, one could get up to 140k of leftover 529 to next generation beneficiary with a 5 year allowance.

This does seem to push the limits on the step doctrine, as I would have essentially transferred the 529 $ to my grandkids in two steps.

[jfoxcpacfp]

TheGipper wrote:

If in the future, if I transfer to UT529 and change the owner to my oldest child (but keep beneficiaries unchanged), would this step by treated as a separate gift? I hope no.

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No, although I'm no 529 expert, either. It is the change of beneficiaries that matters.

TheGipper wrote:

If years later my oldest child, as the owner, changes the beneficiary to her kids, would this step count as additional gift or fall under generation skipping tax?

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This would count as a gift, but the beneficiary hasn't skipped a generation. Believe it or not, the IRS is not clear on who is making the gift. See Avoiding Section 529 Pitfalls in Financial Advisor Magazine online (my favorite planning mag). You may have to set up an account. If you don't want to do so, I can share the article with you but I would have to have your email addy.

[adventure]

For what it's worth, we consider some things to be just too much of a hassle for both of us to sign paperwork. For example, one of us owns all the cars, because there is no sane reason for both of us to spend more time at the DMV.

[TheGipper]

Johanna, to clarify.

Currently, I can/have been funding kids 529s (with spouse as owner) with up to 14,000/yr (or 28,000/yr spousal split gift) to stay under annual gift tax exemption limits.

If in the future, if I transfer to UT529 and change the owner to my oldest child (but keep beneficiaries unchanged), would this step by treated as a separate gift? I hope no.

If years later my oldest child, as the owner, changes the beneficiary to her kids, would this step count as additional gift or fall under generation skipping tax? In guessing yes, but haven't at all done my homework on this. I'm assuming this is well established law if people use 529s as an estate strategy.

[jfoxcpacfp]

ENT Doc wrote:

Interesting.  So my son can’t transfer unused funds to his child without incurring a penalty?

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That's not what I said. He can't transfer the funds to his best friend's kid without incurring a penalty. Your son's transfer would be a gift. These rules were put into place to prohibit what you're trying to do (generational wealth transfer). No reason to lock your money into a 529 if that is your goal. A trust might be more appropriate.