As part of the divorce decree my wife has suggested giving my daughter who will be turning 18 shortly custodial access to her 529 plan. Our plan permits transfer of funds to custodial assets to her but the aside from the obvious loss of control it seems to add unnecessary complexity to a college aged student.
I trust she will use the funds for QHEE but as custodian she would have unencumbered access to the funds to use them as she pleases. If she were to make a non-qualified withdrawal, she would be subject to taxes and penalties, and perhaps clawback of state tax deductions. She would also have to file her own taxes, presumably, which would eliminate either of us being able to count her as a dependent.
There also appear to be financial aid consequences, as the fund would become her assets and not parental assets.
Finally, she will be responsible for managing the investments throughout her college years and she has never managed investments.
I would be interested from hearing from anyone with experience who has gifted funds or transferred custodianship to their child at start of college, and if there are other issues we should be considering. Thanks.