This week, Gail addresses 529 college savings plan transfers and delivers the sad truth about "vacation" refunds.
My elderly mother opened a 529 college savings plan for my daughter. So far she has contributed the maximum allowed: $55,000. We understand in five years this will reduce her taxable estate by the same amount.
Here's my question: After the 5-year period is up, can my mother transfer ownership of this account to me so she doesn't have to keep getting the quarterly statements and making decisions about the investments in it anymore? Would this be a taxable gift?
Dear Jay —
There's no official IRS guidance on this question, and as a result, individual 529 plans vary as to whether and when they will permit a transfer of account ownership. However, I've had two conversations with the IRS on the gift tax issue and both their 529 attorney and gift tax attorney say: "No."
To be specific, I was told, "There is nothing in the tax code or regulations that says gift tax is applicable when ownership transfers." That's because in the eyes of the IRS, the owner of the account is basically acting as a trustee.
A 529 plan is different from other assets because while it requires you to name a beneficiary, he/she never gets control of the account (unless you want them to). Only the "owner" of the account can authorize a withdrawal and change the investments. In fact, the owner can even change the beneficiary to another family member.
This is a HUGE advantage over "Uniform Gift to Minor" or "Uniform Transfer to Minor" accounts (UGMA/UTMA), where the child gets complete control over the money once he/she reaches the legal age of adulthood in your state.
Typically, this is 18 or 21. Even if grandma had intended the money in an UGMA to be used for college, once he's considered an "adult," Junior is free to spend it on anything he wants. And neither grandma nor his parents can do a darn thing about it. (Just picture the look of ecstasy on a 21-year-old's face at the thought of suddenly coming into possession of, say, a hundred thousand dollars...)
But with these relatively new college savings plans, there is no such risk. If the beneficiary decides not to attend college, or takes up basket-weaving instead of pre-med, the owner of the 529 plan can simply shift the beneficiary to a sibling, a cousin, a grandchild, or even a relative who is older, such as an aunt or even yourself if you want to go back to school. That's another wonderful benefit of 529s — they're incredibly flexible.
If there is money left in the account after the beneficiary graduates, there is no time limit on when it has to be used. At that point, you can either name another family member as the beneficiary or simply leave the account where it is until you decide upon someone. For instance, if a child were born into the family a few years later, the owner of the account could then appoint him/her the new beneficiary.
According to the IRS, because contributions to a 529 plan are considered "completed" gifts, the only time gift tax might be an issue is if the beneficiary is changed to someone who is in a younger generation. An example would be changing the beneficiary from your daughter to her son at some point in the future.
Furthermore, in this example, there would only be gift tax due if you transferred more than $55,000 to your grandson. That's because, under a special provision of the tax code, you can give five years worth of annual gifts (5 x $11,000) to a 529 plan in a single year, but giving that beneficiary anything else of value before the 5-year period is up would exceed the annual "allowance" and trigger gift tax.
There are complex regulations concerning 529 contributions and estate taxes, which I can cover in a later column; for now, just keep in mind that these contributions have the potential to significantly reduce estate taxes while allowing the account owner to keep control of the money until the day he or she dies.
Trust me, there is not another account like this in America.
Now, here's where it gets a little tricky. Even though he/she has no control over the change, the original beneficiary on the 529 plan would owe the gift tax if more than $55,000 were transferred to someone in a younger generation. That's because in the eyes of the IRS, the gift is coming from the original beneficiary, not from the owner of the account.
Most sponsors of Section 529 plans have a place on their account application which asks you to name a contingent owner — someone who would take the place of the original owner when they died. While this is the most common reason ownership, i.e. control, of the account would change, the folks at the IRS told me there is nothing in the law which prevents someone from transferring this privilege while they're alive.
So if your mom didn't want to monitor the investments in your daughter's account, she could simply authorize you to take her place as the "owner". And she doesn't have to wait until the five-year period is up. Even though you would then have complete control over the money — including the ability to take non-qualified withdrawals for things completely unrelated to your daughter's college education — transferring the ownership of the 529 account should not be considered a "gift."
Hope this helps,
After Sept. 11, there was an incentive for taxpayers to go on vacation. There was a $1,000 refund mentioned for anyone who went on a vacation after this tragedy.
I am wondering if this is still true and if so, is this including vacation by traveling in one's own vehicle?
This sounds like something the travel and tourism industry might have wished for, but I'm afraid that's about as far as it got. In fact, the person I spoke with at the IRS said if there were such a refund, he'd be on vacation right now!
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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.