#43389 - 05/22/08 01:19 PM
adding to 529 plan if you are bene
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rickcollege
Registered: 05/22/08
Posts: 3
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Hi, dad (owner) established a 529 plan for 17 yr old son and put in 10k this year. Son (bene) inherited 150k and wants to contribute to this 529 plan. Son would like ot put in 100k or so. Would the 60k rule apply where it's his money for his benefit? what other options would be avaialble to get money in there? thanks
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#43390 - 05/22/08 01:37 PM
Re: adding to 529 plan if you are bene
[Re: rickcollege]
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Drew
Registered: 01/09/00
Posts: 2478
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Laymans take:
To place funds into an account for yourself is NOT a gift under any conventional or tax use of the term --so the transaction would NOT seem to be a gift issue subject to any gift rules. (At least as to Federal rules) Do not take the issue further than the immediate issue --don't look for problems. Note the whole federal concept is that funds are a transfer to the named beneficairy
State rules could always differ--but I presume your concern was with Federal gift issues.
The ability of a minor to transfer his own funds to himself could fall under some quirky state rules and there could be some state rules as to the form in which the executor must deliver funds to a minor---but I doubt they are relevant to your question as posed.
Why not all $150,000? Thats not a funny question if the 17 year old could otherwise be looking at a decent financial aid package.
_________________________
Drew
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#43391 - 05/22/08 03:47 PM
Re: adding to 529 plan if you are bene
[Re: Drew]
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rickcollege
Registered: 05/22/08
Posts: 3
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good point. thanks
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#43392 - 05/22/08 06:05 PM
Re: adding to 529 plan if you are bene
[Re: rickcollege]
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Joe Hurley
Registered: 01/07/00
Posts: 2080
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In most cases like this, the dad and son would maintain separate 529 accounts. Combining assets into one 529 means one of them loses control over their money.
Where's the 150K right now? If in the bank or a mutual fund, it's probably already set up as UTMA. When contributed to a 529, it would be a custodial 529 account. Nothing wrong with that - the custodianship terminates when your son reaches legal age in his state.
If liquidating the son's investments to fund the 529 plan creates taxable gain, watch out for the kiddie tax.
Joe
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#43393 - 05/22/08 09:48 PM
Re: adding to 529 plan if you are bene
[Re: Joe Hurley]
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rickcollege
Registered: 05/22/08
Posts: 3
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The 150k is in a checking account in son's name alone. was inheritance from his grandmother and the thought was to defer taxes even though this will all be spent in the next 5 years. I had a couple of thoughts. One was to have son write a check to the existing 529 plan (dad is owner son is bene). there was some conflicting info I got as whether this would be a "gift" from the son to his own account and therefore subject to the 12k or 60k (pre pay 5 yrs). I feel, it's not a gift if it's merely the son taking from his account to fund this one. The glitch may be that he doesn't own this 529 and if that's an issue than establishing his own 529 as owner and bene could solve that. Seem right? thanks!
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#43394 - 05/23/08 09:58 AM
Re: adding to 529 plan if you are bene
[Re: rickcollege]
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Drew
Registered: 01/09/00
Posts: 2478
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You have got to understand that many of the laws are a patchwork and 529s are new and do not necessarily fit prior concepts and patchworks. The 529 at the federal level represents a very unique separation of dominion and control over an asset which is the asset of the beneficiary and not of the plan owner. Because of Constitutional issues the states are free to treat the property issues differently, and some do. And in some cases there simply may not be a clear answer at all, never mind that some areas are essentilly not going to get reviewed. And in some cases even if something is different it may be moot---for example, even if under state law a transfer to ones self in context of 529 could be viewed as a gift, if the state imposes no relevant gift tax the impact may be moot at state level.
The transfer by the executor of $150,000 directly to a minor may well have posed some technical glitches: but for now the end result is good news and lets not invite visiting past glitches.
Technically I suspect a UTMA poses some issues as a UTMA is very likley in your state designed to address transfers TO a minor and not transfers by minor of his own funds. But I suspect this point will never come up as an enforcement issue.
Essentially as a matter of law we are dealing with is a step prohibited--if its not a prohibited action then why not. (And in some cases a step could be prohibited but carry a zero penality and you need to read betwen the lines on that one. One specific relevant example : in a state which prohibits anyone BUT the plan owner from contributing to a 529 for a non owner to contribute could pose some glitches --be it well intentioned cousin, friend, or beneficiary--but one needs to think thru if there is a real penality or even any enforcement and ways to side step it--from what I read the penality consists of returning the money to the person making the transfer--now no plan designed to attract funds is going to try to find way to reject funds. Now even if that prospect existed I'll bet its obfuscated by use of bank check.
So much for the ramblings, lets narrow it down.
1. In context of the specific state law for the 529 you have or seek to have is a contribution by beneficiary to the account a prohibited transaction or not. Hint, its NOT prohibited in something over 47 states.
2. Does your state impose a gift tax and does your state define a transfer of funds to ones self as a gift (that should be an obvious oxymoron but hey, state law's differ.)
3. Show me where under Federal law to transfer ones own funds from one of ones own accounts to another of any account set up for me as beneficairy is a gift. Hint, it will be a long search! That said, once the funds are in the 529 then there are clear specific gift rules for any subsequent changes.
4. If by some chance you were mistaken as to 150,000 being in childs account and meant it was in a custodial account for him, repost. There are at least two views on how to address same, I'll give you two if necessary
Personally I suspect you will run into no real world legal problems with either to use your rexisting 529 or to set up a new one with a UTMA.
As a practical matter a 529 you hold is far more flexible and there are some other restrictions as to UTMA/529s
A 529 is NOT a tax deferal tool--it is a tax ELIMINATION tool if properly used for education, a better tool!
If college aid is a consideration, to hold the money in his checking account is a disaster . Under current rules a UTMA/529 doesn't count-BUT this rule changes in about a year--so that a 529 held by parent or a UTMA/529 count the SAME and in both cases it is as if they were held by parent. There is one further wrinkle you didn't mention, if sons funds are parked in a 529 owned by somebody other than child or parent then they are completely out of the asset picture under FAFSA. Now this poses other risks and only makes sense in some very narrow fact patterns. But if you think it matters in your case, run thru some financial aid models on a site such as finaid.org
_________________________
Drew
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#43395 - 05/23/08 02:23 PM
Re: adding to 529 plan if you are bene
[Re: Drew]
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Dopps
Registered: 01/23/02
Posts: 1187
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Rick: The term "owner" in the 529 world is really a misnomer--"account holder" or "responsible individual" would be more accurate. In this case, Dad is merely overseeing an account for his minor child, but do not be misled by the "owner" title--the assets in said account clearly belong to the son. So, by adding his own assets to the 529, the son is NOT co-mingling funds that are owned by different parties. All of the money in this 529, even after the additional deposit, will belong to the son.
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#43396 - 05/23/08 02:36 PM
Re: adding to 529 plan if you are bene
[Re: Dopps]
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Drew
Registered: 01/09/00
Posts: 2478
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Well close but there is a fly in that that bothers some people --but outside the scope of original post as posted and not a problem as posted .
Technically the plan owner, absent a legal impediment such as minority , has the legal right to change the beneficairy along the relevant family tree.
_________________________
Drew
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#43397 - 05/23/08 04:10 PM
Re: adding to 529 plan if you are bene
[Re: Drew]
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anonymous
Registered: 03/29/05
Posts: 1992
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Dopps, this post is so unlike you. I have to completely disagree with your post. The term "owner" in the 529 plan is anything but a misnomer. The owner of the account has complete control of the money. He can legally use it for any purpose that he would like. He has no obligation of any sort to use it for the benefit of the beneficiary. If the son puts the money into an account that the dad owns, the money will legally belong to the dad. Don't confuse how things get treated from a gifting standpoint with the reality of ownership.
"Responsible Individual" would only be accurate if we are talking about an UTMA 529 plan in which case the account holder and the responsible individual would be different people.
The owner can do anything that he wants with the money. The beneficiary can't do a thing. In terms of ownership, there is no difference between the dad having a bank account and having a 529 plan. In either case, it is his money to do whatever he pleases.
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#43398 - 05/23/08 04:14 PM
Re: adding to 529 plan if you are bene
[Re: anonymous]
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anonymous
Registered: 03/29/05
Posts: 1992
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rickcollege, gifts to a 529 plan are based upon the beneficiary. Therefore, if dad owns a 529 plan with the son as the beneficiary, the son is giving money to himself, which isn't a gift, so no gift takes place. He could contribute as much as the plan allows with no gifting issues.
Just keep in mind that if he puts the money into a 529 with his dad as owner, it is his dad's money.
It is not good to assume that this money will be spent for higher education over the next 5 years.
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