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529 Plan Transfer of Ownership

 
 
A.G. Kalman
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      07-05-2007, 02:57 AM
Rich Carreiro wrote:
> jay1000 <(E-Mail Removed)> writes:


> [talks about changing the "Account owner" of a 529 plan]


>> My understanding is there are no tax consequences unless it
>> is an "abusive" transfer. Can anyone suggest the
>> circumstances under which there would be tax consequences?


> Well, if the account is worth more than $12,000, I believe
> there will be gift tax consequences (a gift tax return would
> have to be filed even if (as would be likely) no gift tax
> due).


I may be confused but the donee of a 529 (QTP) plan is the
beneficiary. When one makes a contribution to a QTP the
rules relating to gift taxes are based on the donor making a
completed gift to the donee (beneficiary). I don't see how
there would be gift tax implications just because the owner
(trustee) is changed.

Now, if the new owner changes the beneficiary there could be
gift tax implications. Here is the paragraph in Sec. 529:

(B) Treatment of designation of new beneficiary.--
The taxes imposed by chapters 12 and 13 shall apply
to a transfer by reason of a change in the designated
beneficiary under the program (or a rollover to the
account of a new beneficiary) unless the new
beneficiary is--
(i) assigned to the same generation as (or a
higher generation than) the old beneficiary
(determined in accordance with section 2651), and
(ii) a member of the family of the old beneficiary.

In other words, the new beneficiary would have to be a
member of the same family and either of the same generation
or younger or gift taxes would come into play.

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jay1000
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      07-05-2007, 02:57 AM
joetaxpayer <(E-Mail Removed)> wrote:
> Stuart Bronstein wrote:
>> joetaxpayer <(E-Mail Removed)> wrote:
>>> Ira Smilovitz wrote:
>>>>"jay1000" <(E-Mail Removed)> wrote:


>>>>> "From Commonwealth of Virginia 529 College Savings Plan
>>>>> Program Description
>>>>>
>>>>> Can I transfer ownership of the account?


>>>> Wouldn't transfer of ownership be subject to gift tax
>>>> considerations?


>>> Agreed, but wouldn't this transfer be subject to the same 5
>>> year rule (that you can gift up to 5 years' worth or $60K
>>> and while you must file a gift tax form, there is no tax
>>> due)?


>> There's no five year rule. There is a lifetime exclusion.
>> You can give up to a total of $1,000,000 that is supposed to
>> appear on gift tax returns before any tax is due.


> A deposit to the 529 has a 5 year look ahead, so one can put
> in $60 and not tap the $1M lifetime gifting credit. If you
> are suggesting this is ignored for transfer of beneficiary,
> that may be. But 529s have a five year rule. There seem to
> be a number of specific details that are either unadressed
> or not well publicized, I think this is one of them.


The 5 year rule is another interesting feature of 529's.
Assuming that this feature has NOT been used, are there any
tax consequences to a transfer of ownership of a plain
vanilla 529?

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joetaxpayer
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      07-06-2007, 03:51 AM
jay1000 wrote:

> The 529 is a peculiar animal. It can be funded by your
> annual gifting to its beneficiary. So there is no gift
> tax. The amount of the gift is no longer part of your
> esatate.


Exception - the gift-ahead amount of a 5-year gift is pulled
back into your estate if you die before the 5 years have
passed. e.g. if you gift $60K to a 529, and die tomorrow,
$48K is still part of your estate.

> But you are still the owner of the 529. You can
> change the beneficiary to some other relative with no tax
> consequence.


If the beneficiary is more than a generation off (as a shift
to a grandchild), there may be 'generation-skipping' issues,
and consequent taxes.

> Apparantly you can also change the ownership
> with a "maybe" tax consequences. My question is why a
> "maybe"? If I could understand what would trigger a tax, I
> might be able to avoid it.


I believe the 'maybe' stems from potential abuses. As you
stated in your initial question, the IRS wants to avoid
'abusive' transfers. The use (misuse) of these accounts can
potentially move quite a bit of money around. I'm also
thinking about the aspect of "poor man's trust" that a 529
can serve. It's money removed from one's estate, has more
flexibility than a revocable trust, and needs no trust
documents (with all the costs of same). The downside of this
use is the investments within the 529 are limited, and carry
higher fees, and the 10% non-school withdrawal penalty.

This doesn't answer the question. I look forward to a clear
answer on the exact details. Remember, there's two potential
transfers, change of beneficiary and change of owner. A
clear answer on when there are gift tax consequences would
be great.

JOE

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<< The foregoing was not intended or written to be used, >>
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<< that may be imposed upon the taxpayer. >>
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Rich Carreiro
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      07-06-2007, 03:51 AM
"A.G. Kalman" <(E-Mail Removed)> writes:

> I may be confused but the donee of a 529 (QTP) plan is the
> beneficiary. When one makes a contribution to a QTP the
> rules relating to gift taxes are based on the donor making a
> completed gift to the donee (beneficiary). I don't see how
> there would be gift tax implications just because the owner
> (trustee) is changed.


The owner (trustee) can take money out of the 529 at
any time for any reason (though he'll pay income tax
and a 10% penalty tax on earnings if the distribution
isn't used for the beneficiary's qualified education
expenses).

If the owner can name a different owner of the 529
plan, and if that transfer was not subject to gift
tax, that would create a massive loophole in the
gift/estate tax structure.

I know Congress can be brain-dead, but I doubt
they were that brain-dead. Therefore I'm willing
to bet that:
(a) ownership of a 529 plan can't be changed, or
(b) if it can be, gift tax rules do apply.

--
Rich Carreiro (E-Mail Removed)

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A.G. Kalman
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      07-09-2007, 04:30 AM
Rich Carreiro wrote:
> "A.G. Kalman" <(E-Mail Removed)> writes:


>> I may be confused but the donee of a 529 (QTP) plan is the
>> beneficiary. When one makes a contribution to a QTP the
>> rules relating to gift taxes are based on the donor making a
>> completed gift to the donee (beneficiary). I don't see how
>> there would be gift tax implications just because the owner
>> (trustee) is changed.


> The owner (trustee) can take money out of the 529 at
> any time for any reason (though he'll pay income tax
> and a 10% penalty tax on earnings if the distribution
> isn't used for the beneficiary's qualified education
> expenses).
>
> If the owner can name a different owner of the 529
> plan, and if that transfer was not subject to gift
> tax, that would create a massive loophole in the
> gift/estate tax structure.
>
> I know Congress can be brain-dead, but I doubt
> they were that brain-dead. Therefore I'm willing
> to bet that:
> (a) ownership of a 529 plan can't be changed, or
> (b) if it can be, gift tax rules do apply.


I don't know what massive loophole you refer to. Any
contribution to a 529 plan is a completed gift. Until such
time that one changes the designated beneficiary there can't
be any "gift tax" consequences as no gift is made when the
owner or participant (as some plans call the account owner)
is changed. A change in the account owner has no immediate
impact to the designated beneficiary. Distributions may have
"income tax" consequences to the distributee.

The Pension Protection Act of 2006 added Sec. 529(f) that
gives the Treasury Sec'y authority to "prescribe such
regulations as may be necessary or appropriate to carry out
the purposes of this section and to prevent abuse of such
purposes, including regulations under chapters 11, 12, and
13 of this title."

No regulations have been issued. I have no doubt that if
abuse of the 529 rules relating to gift and/or estate taxes
occurs, the regulations would be forthcoming.

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
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joetaxpayer
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      07-09-2007, 04:30 AM
Rich Carreiro wrote:

> If the owner can name a different owner of the 529
> plan, and if that transfer was not subject to gift
> tax, that would create a massive loophole in the
> gift/estate tax structure.
>
> I know Congress can be brain-dead, but I doubt
> they were that brain-dead. Therefore I'm willing
> to bet that:
> (a) ownership of a 529 plan can't be changed, or
> (b) if it can be, gift tax rules do apply.


From pub970;

Changing the Designated Beneficiary

There are no income tax consequences if the designated
beneficiary of an account is changed to a member of the
beneficiary's family (defined above). [a list of 9
relationships follows the cite above]

Rich I agree with your logic 100%, to me even such
flexibility on beneficiaries is opening a door for abuse. Do
you (or anyone here) have any IRS reference that the owner
change is what triggers the gift tax consideration? And if
gift tax applies, does the 5X rule allow a shift of
$60K/owner with no tax?

Just from a logistics standpoint, if I transfer an account
to a cousin as beneficiary, I'd rather not be saddled with
the 'ownership' as well, would it be natural to want to
change the owner to the new beneficiary's parent? Whatever
the case, I'd love to see a definitive explanation of this.

JOE

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
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Rich Carreiro
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      07-09-2007, 04:30 AM
jay1000 wrote:

> Apparantly you can also change the ownership
> with a "maybe" tax consequences. My question is why a
> "maybe"? If I could understand what would trigger a tax, I
> might be able to avoid it.


According to the official offering document for the "U.
Plan" (which is Massachusetts's Section 529 plan), the owner
of a 529 plan cannot be changed (except that a designated
successor owner can be named for when the original owner
dies). According to the document, if you want to change the
owner of the plan, the existing owner would have to close
out the plan (and therefore pay income tax and the penalty
tax on the earnings), give the money to the desired new
owner (and so have to file a gift tax return) and the new
owner would open the account with the money.

--
Rich Carreiro (E-Mail Removed)

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<< The foregoing was not intended or written to be used, >>
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<< that may be imposed upon the taxpayer. >>
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Rich Carreiro
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      07-12-2007, 11:34 PM
"A.G. Kalman" <(E-Mail Removed)> writes:

> I don't know what massive loophole you refer to.


The massive loophole would be (if changing owners
were allowed) this:
1) I put $N into a 529, with myself as owner/participant
and whoever as beneficiary.
2) Now I change the the owner/participant to someone else.
3) That person takes all the money out as a non-qual
distribution.

If there's no gift tax at step (2), I've just managed to
transfer $N to the other person free of gift tax
consequences.

As for objecting to step (3), at least for MA's 529 plan
(and I suspect all others), the owner/participant is free to
take the money out for any reason, though they'll of course
have to pay income tax and the 10% penalty on any earnings.

> contribution to a 529 plan is a completed gift. Until such
> time that one changes the designated beneficiary there can't
> be any "gift tax" consequences as no gift is made when the
> owner or participant (as some plans call the account owner)
> is changed. A change in the account owner has no immediate
> impact to the designated beneficiary.


At least for MA's 529 plan, the owner/participant *cannot*
be changed. To "change" the participant, the original
participant must close out the account, paying income tax
and the penalty on the earnings, give the money to the
desired new participant (and that's where the gift tax will
come into play) and the new participant will have to open a
new 529 account and contribute back the money.

> Distributions may have "income tax" consequences to the distributee.


To be specific, distributions made to the beneficiary or his
school are taxed to the beneficiary (to the extent they are
non-qualified) and distributions made to anyone else are
taxed to the owner/participant.

--
Rich Carreiro (E-Mail Removed)

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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A.G. Kalman
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      07-13-2007, 09:18 AM
Rich Carreiro wrote:
> "A.G. Kalman" <(E-Mail Removed)> writes:


>> I don't know what massive loophole you refer to.


> The massive loophole would be (if changing owners
> were allowed) this:
> 1) I put $N into a 529, with myself as owner/participant
> and whoever as beneficiary.
> 2) Now I change the the owner/participant to someone else.
> 3) That person takes all the money out as a non-qual
> distribution.
>
> If there's no gift tax at step (2), I've just managed to
> transfer $N to the other person free of gift tax
> consequences.


May be my problem is with "massive." If I want to transfer
X$ to someone else and avoid gift tax, why not just gift the
$12000 to that someone else rather than putting it into a
529 and then changing owners? If I put more than $12000
into the 529, I pay gift tax. Now... someone is going to
bring up the five year rule of gifting $60000 into the 529
plan all at once. I would think that if the owner changes
within the five year period there would be a prorated amount
subject to tax (just as if the donor had died before 5 years
elapsed). If not, then this is an example of abuse that the
Sec'y can fix via the regulation authority granted by
Congress in the Pension protection Act.

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<< The Charter and the Guidelines for submitting posts >>
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