#42914 - 03/09/08 03:11 PM
PA 529 GSP
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sharkey
Registered: 12/09/07
Posts: 8
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I am a PA resident, married (spouse does not work - no PA income), and I have two children - starting college Sept 2010 and Sept 2012. Since my wife does not work I was thinking about setting up four accounts (son, daughter, wife and myself) with me being the owner of each of the accounts. I was going to put 12,000 into each of the account each August (starting this year) - this would give me a PA state tax break of about $1500.00 per year. I would then transfer my account and my wife's to our children when needed for college expenses. I plan to do this every August up to 2014, for a total of 7 years. I presently have about 325,000 saved in a municipal bond fund (gets about 3.5% tax free) for college. By funding the PA 529 GSP each August I would get the percent increase for the year and allow the rest of by money to get interest in the bond fund until the next August when I deposit an additional 48,000 - this also gives me the maximum PA tax benefit each year (I could deposit 60,000 into each of the four accounts for 5 year gift tax , but I can only deduct maximum of $12,000 per year for each account for the PA tax benefit. Is my logic and information correct? Any other ideas or suggestion appreciated.
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#42915 - 03/10/08 12:08 AM
Re: PA 529 GSP
[Re: sharkey]
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Drew
Registered: 01/09/00
Posts: 2422
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You are correct about how to pack the number of accounts as to PA rules.
But since a transfer to yourself or to your (US) spouse is not a gift you need not worry abou tthe size of GSP at parent VER when you move the beneficairy down a generation you neeed to address gift tax issues.
For that matter you might be better off to use nieces and nephews for starters?
I believe if you front end load in PA you can carry income tax deduction forward. If GSP's internat rate of return (tuition) exceeds the bond rate it may make sense to front end load --and I suspect tuition inflation exceeds 3.5%
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Drew
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#42951 - 03/13/08 04:18 PM
Re: PA 529 GSP
[Re: Drew]
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sharkey
Registered: 12/09/07
Posts: 8
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Drew, I thought that in PA you could not carry the deduction forward - so that if I put 60K into each account for my two children the most I could take as a PA deduction was 12K for each child and I would lose the other 48K deduction per child. Does anyone else know if this is true.
Thanks
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#42952 - 03/13/08 04:26 PM
Re: PA 529 GSP
[Re: sharkey]
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Drew
Registered: 01/09/00
Posts: 2422
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You may be right as to PA has no carryforward --I didn't check recently.
But if it doesn't --whynot use plans inintally set up for other family members to meet you front end load desires
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Drew
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#42955 - 03/13/08 06:48 PM
Re: PA 529 GSP
[Re: Drew]
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sharkey
Registered: 12/09/07
Posts: 8
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Drew, As long as I am the owner of the plan I can use nieces and nephews (even though I have no intention of giving them this money) and then transfer the money to my children's account? Would this bypass the gift tax issues - so it is better then having an account for myself and my wife and then transferring the money to my children.
Thanks
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#42956 - 03/13/08 07:22 PM
Re: PA 529 GSP
[Re: sharkey]
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Drew
Registered: 01/09/00
Posts: 2422
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You can use multipe accounts to max up the $12 k units. Lateral shifts are gift tax fee--remember that down a generation one can tigger gift issues if beyond $12K /yr/person--but remember the gift is deemed for the prior beneficairy NOT the first donor--so old Uncle Henry may be useful after all?
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Drew
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#43308 - 05/11/08 10:24 AM
Re: PA 529 GSP
[Re: Drew]
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sharkey
Registered: 12/09/07
Posts: 8
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Drew, I don't understand the gift tax issue. If I open 10 accounts with 12,000 each this August - I will be the owner of each of the accounts (to get the 3.07% PA deduction) and use my other family members as the beneficiaries - even though my only attention will be to transfer the money form this other accounts to my son and daughter. If I transfer 5 of these accounts to my son - and say each account has over 12,000 in it (greater than 60,000) will this trigger any kind of estate tax problem? I don't understand "the down a generation issue" Thanks for you help
Sean
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#43309 - 05/11/08 11:55 AM
Re: PA 529 GSP
[Re: sharkey]
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anonymous
Registered: 03/29/05
Posts: 1944
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Sharkey,
Here's an example for you of "the down a generation issue":
You set up a 529 plan with your brother, John, as the beneficiary. You put $12,000 into the account. You get a tax deduction. In the future, the account grows to $14,000 and you change the beneficiary from John to your son. From the gifting perspective, it is treated as if John made a $14,000 gift to your son. Assuming that John did not make any other gifts to your son, this change of beneficiary on money that John never possessed or controlled will cause him to either owe taxes on $2,000 of the "gift" or lower his lifetime exemption by $2,000.
In short, you are creating problems for others and not yourself. I have no idea what the IRS would do if someone abused this. If nothing else, it certainly isn't right to cause taxation to another person.
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#43317 - 05/12/08 10:51 AM
Re: PA 529 GSP
[Re: anonymous]
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Drew
Registered: 01/09/00
Posts: 2422
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Technically if John is deemed to have made a $14,000 529 gift to yourson then John is free to elect the 5 year average rule. So with a bit of intrafamily tax smarts sums of around $60,000 each may be moveable w/o tax issues. However if the SOLE purpose is federal tax evasion the IRC says the IRS can put you under a microscope. Now to my way a thinking a plan which is designed to max up your state benefits by its very nature is a plan which is not motivately solely by avoidance of federal taxes. But I sure think I'd max up the time spread from when I made a gift to when I moved any such gift......
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Drew
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#43318 - 05/12/08 11:35 AM
Re: PA 529 GSP
[Re: Drew]
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anonymous
Registered: 03/29/05
Posts: 1944
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Drew, you are right about John. This, of course, assumes that John is even made aware of the fact that he made a gift. He may have no idea. Regardless, there is a good chance that he'll be upset since his tax situation has just become more complicated because of how he was used.
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