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  • 529 as legacy plan

    I'm sorry for rehashing topics but I wanted to clarify in light of new rules.

    529 monies not utilized for kids.  if I dropped that down to grandchildren, that would be an estate gift and not taxed or would that be subject to some penalties?  so once the grandchild is born, we can transfer 14k/28k if married a year tax free to grandchild?

    if inclined should I start stuffing the 529 then?  is it better than a roth in that there wouldn't be mandatory distributions at inheritance but still tax free?

    sorry if stupid.

     

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    The IRS takes an interest in a transfer whenever the transfer involves a shift two steps down from your generation, and "skips" a generation. This skip subjects the account owner (or beneficiary) to the generation-skipping transfer tax‎. This skip is especially pertinent to grandparent's setting up, or shifting beneficial 529 interests to grandchildren. Fortunately, the same tax exclusions applying to the basic gift tax also pertain to the generation skipping transfer tax. One is allowed an annual $14,000 ($28,000 if there is a spousal "split") exclusion to the generation skipping transfer tax. One can also exclude up to $70,000 ($140,000 if there is a spousal "split') by electing five year forwarding of the transferred interest. Any transfer that involves a skip would benefit from the counsel of a qualified CPA.

  • #2
    That is an interesting question that I would like to know answer to.  With young kids, I am trying to frontload the 529s by a few years of age.  What I do beyond that I am not sure yet.

    I was under the impression that even if overfunded (i.e. my kid gets full ride), no big deal because I can let it sit and compound for decades for grandchildren and great grandchildren, etc.

    But by what your saying, if there is 500k left in my child's name by the time a grandkid is born, I couldn't redirect all of that money to the grandkid at the time of birth...I would have to do 30k/year or 140k every 5 years in order to avoid penalty?

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    • #3




      But by what your saying, if there is 500k left in my child’s name by the time a grandkid is born, I couldn’t redirect all of that money to the grandkid at the time of birth…I would have to do 30k/year or 140k every 5 years in order to avoid penalty?
      Click to expand...


      You are mostly correct, but it is not a penalty and not likely a tax either.

      We are talking about gift tax reporting. Even if your yearly contributions exceed the annual exclusion and your five year contributions would exceed the five year exclusion.

      We are only talking about applying these excess amounts against the unified gift/estate tax lifetime exclusion. This was raised in the tax reform to $11.2M/person, that's $24.2M/couple.

      Look if you had a grandchild born this year. A couple would have the ability to rollover $150K in current dollars every five years. By age 20 you could rollover $750K in current dollars and that is for each grandchild. Only then would you even have to go to the unified exclusion.

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      • #4
        I’m happy to create a multi generational educational slush fund. Tax free growth over generations maybe incredible.

        Maybe more likely to be beneficial than outright inheritance? Kind of like a trust fund as it stongly incentivizes use on education which in turn should enhance future generations earning potential.

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        • #5
          Still a lot of uncertainty for generational even before the tax reform on how IRS treating this.   It does pose as a great transfer of wealth if you're pushing the estate tax limits and have a bunch of grandkids; but the rollover have to be careful if it nears the $140k mark for the 5 year bolus limit.

           

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          • #6
            What happens with the next generation (great grandchildren)? Do the same rules apply?

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            • #7
              As it currently stands there is no limit to the number of generations. when an account owner dies and there is a successor owner, the account and GST/gift tax reporting would be the responsibility of the new owner.

              If you fail to name a successor owner or the successor owner dies before you. It depends on the terms of the 529 plan document. In most plans the account beneficiary becomes the account owner by default if there is no named successor owner.

              If your 529 plan defaults to the estate, it gets a little trickier. It is then subject to state law which could transfer ownership to the beneficiary, follow the will or intestate rules absent one.

              Just like you should ALWAYS designate a beneficiary for retirement plans. You should ALWAYS designate a successor owner for 529 plans.

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