#43427 - 05/28/08 06:34 PM
Death of a Beneficiary Estate Inclusion
|
anonymous
Registered: 03/29/05
Posts: 1981
|
Drew mentioned that he thought that if a beneficiary died, the value of the account would be included in their estate.
I have always believed this not to be the case and the value would not be in the beneficiary's estate.
Section 529(c)(4)(A) says, "In general. No amount shall be includible in the gross estate of any individual for purposes of chapter 11 of an interest in a qualified tuition program."
Section 529(c)(4)(B)says, "Amounts includible in estate of designated beneficiary in certain cases. Subparagraph (A) shall not apply to amounts distributed on account of the death of a beneficiary."
My read of this is that it is only included in the estate of the beneficiary if the death of the beneficiary causes a distribution to be made. If there is not a distribution, it is not part of the beneficiary's estate.
What is left unsaid with this is whether the details of the distribution matter. For instance, it would make sense if the money gets distributed to the beneficiary's estate, that it would be included in the beneficiary's estate. However, if it got distributed to the owner, it would make no logical sense for it to be counted in the beneficiary's estate. The estate would owe money that never belonged to them and never had to be used for their benefit. (There are some proposed regs that would spell this out...basically only distributions to the estate of the beneficiary would be includable.)
Joe, can you please comment on this. Thanks!
|
|
Top
|
|
|
|
#43432 - 05/29/08 08:49 AM
Re: Death of a Beneficiary Estate Inclusion
[Re: anonymous]
|
Joe Hurley
Registered: 01/07/00
Posts: 2075
|
The 1998 proposed regulations say the account is included in the deceased DB's estate, but the 2008 Advance Notice of Proposed Regulations talks about changing this position:
Under section 529(c)(4)(B), amounts distributed on account of the
death of a DB are subject to estate tax. The legislative history (H.R.
Rep. No. 148 at 328) makes no reference to the term ``distributed'' but
provides that the value of any interest in a section 529 account will
be includible in the estate of a DB. Section 1.529-5(d)(3) of the 1998
proposed regulations adopts the position stated in the legislative
history. This position has raised several concerns because, under
generally applicable transfer tax provisions, the gross estate of a
decedent does not include property in which the decedent has no
interest, or over which the decedent has no power or control.
The ANPR goes on to suggest a set of rules for when the account is and is not included in the deceased DB's estate. If the account is distributed (actual or deemed) to the account owner, it is excluded from the DB's estate. If the account is not distributed, and a successor DB is named who is same or higher generation, it is excluded from the DB's estate.
Joe
|
|
Top
|
|
|
|
#43433 - 05/29/08 11:06 AM
Re: Death of a Beneficiary Estate Inclusion
[Re: Joe Hurley]
|
Drew
Registered: 01/09/00
Posts: 2457
|
The PA disclosure statement makes a similar distinction as to state inheritance issues---if it is paid to the estate it is NOT a distribution.
Then again PA is a bit of an odd duck---it is IN the plan "owners" estate if the the "owner" died (PA has a nasty inheritance tax!) unless it is a PA plan and then we exempt it from tax!
Caution: the ANPR creates a logical Catch 22 the very nature of a 529 created a completed gift for the donor and it is clearly NOT in the donors or "owners" estate so says Sec 529----so where is it? To say it is not in designated beneficary's name should he die makes little sense--did it just vanish? It better be someplace or we just invented a new tax dark hole to hide money! It was clearly Congressional intent to give the beneficiary of this gift very very limited control but he most certainly has an interest in the 529 --when used as intended by Congress for education and he most certainly is a potential distributee even for nonqualified uses. If it anti't broke why try to patch it?
My personal view is that the law permits a number of changes to the beneficiary as well as some distribution options---all of which would be viable the day before the beneficiary died. Given that beneficiary has essentially no control of next move even if alive--it might make a whole lot of sense to just treat the next move is if he were alive --and some time limits to get it done. Essentially the moves that ANPR suggests--but I note one glaring absense in ANPRs suggested rules to wit if the next DB is a lower generation then it is IN the decedant estate ?? Logically it would be taxable to decedant were he alive so it sure makes sense to tax him if dead--if that is the (dumb) move that is made? Perhaps the absence is not required as that seems to be how existing rules read--but it would be nice to clarify.
_________________________
Drew
|
|
Top
|
|
|
|
#43437 - 05/30/08 07:17 AM
Re: Death of a Beneficiary Estate Inclusion
[Re: Drew]
|
anonymous
Registered: 03/29/05
Posts: 1981
|
Joe, I would argue that the 1998 proposed regs do not say that the account is in the deceased beneficiary's estate. They say "the value of any interest". I think that a very good argument can be made that as a beneficiary, "the value of any interest" is not the account value. In most cases, this value will be $0.
I'd compare this to being the beneficiary of a life insurance policy. The beneficiary only has something of value if the insured dies. If the beneficiary dies, the value of the life insurance doesn't get included in their estate because the "value of their interest" is $0.
"The value of any interest" will only be the account value if the owner and the beneficiary are the same person or the account gets distributed to the beneficiary's estate.
Edited by anonymous (05/30/08 07:44 AM)
|
|
Top
|
|
|
|
#43438 - 05/30/08 07:31 AM
Re: Death of a Beneficiary Estate Inclusion
[Re: anonymous]
|
anonymous
Registered: 03/29/05
Posts: 1981
|
"Caution: the ANPR creates a logical Catch 22 the very nature of a 529 created a completed gift for the donor and it is clearly NOT in the donors or "owners" estate so says Sec 529----so where is it? To say it is not in designated beneficary's name should he die makes little sense--did it just vanish?"
Drew, try thinking about this in a little different manner. We know that it is not "counted" in the owner's estate. It also makes no sense to count it in the beneficiary's estate if that estate isn't getting the money.
I put the word "counted" in quotes for a reason. Instead of thinking of the money just vanishing, think in terms of counted and uncounted assets. Medicaid has counted and uncounted assets. Federal student aid has counted and uncounted assets. Estates now have counted and uncounted assets.
Examples of uncounted assets:
Medicaid: Primary residence up to a certain amount ($500,000?), life insurance cash value up to $1500, primary vehicle regardless of value
Federal Financial Aid: Life insurance, annuities, primary residence, retirement plans
Estates: 529 plans (except maybe when the owner is also the beneficiary)
The point is that assets don't disappear. They just don't always have to be counted. Something not being counted has not effect on the ownership qualities of that asset.
Edited by anonymous (05/30/08 07:34 AM)
|
|
Top
|
|
|
|
#43439 - 05/30/08 04:29 PM
Re: Death of a Beneficiary Estate Inclusion
[Re: anonymous]
|
Drew
Registered: 01/09/00
Posts: 2457
|
What you and I think doesn't count--its the words that somebody wrote into law that count evenif clear as mud.
So on the day before a beneficairy dies it most certainly is in his name by most rules---and proof of pudding is beneficiary is charged as if he held it when any next move is made. eg backward, lateral or down generation move--and if its down its taxed to prior beneficairy just as if he led it in his hot little hands. So if some rule says its in beneficiarys estate then thats were it is until it gets changed, and as I read PA rules, if it is paid to estate it is deems not to count but if it is distributed elsewere then it counts jsut as if it was there---simple as mud--but thats about what it says......Then again just as one can end run pasing thru an estate by a TOD or POD if the 529 contract allows for a successor beneficairy designation and state law recognizes same--well perhps that solves the state issues. Remember estate and inhertiance taxes most places are zippo---but in places like PA or NJ they can be a real bear. I just got off phone with attorney who told me of client who didn't take advice as to proper state -PA v NJ to die on paper--a $35,000 less to heirs.
_________________________
Drew
|
|
Top
|
|
|
|
#43441 - 05/31/08 01:11 PM
Re: Death of a Beneficiary Estate Inclusion
[Re: Drew]
|
anonymous
Registered: 03/29/05
Posts: 1981
|
Drew, we're going to talk in circles about this one since there sure doesn't appear to be a definitive answer.
"What you and I think doesn't count--its the words that somebody wrote into law that count evenif clear as mud."
You are absolutely correct.
"So on the day before a beneficairy dies it most certainly is in his name by most rules---and proof of pudding is beneficiary is charged as if he held it when any next move is made."
I complete disagree that it is in the beneficiary's name by most rules the day before death. If the beneficiary is looking to buy a house, the money won't get counted as the beneficiary's asset. If the beneficiary is looking to buy life insurance, the insurance company won't count this as an asset of the beneficiary. If the beneficiary is applying for Medicaid, it won't be counted as an asset of the beneficiary. If the sister of the beneficiary is applying for financial aid, it won't be counted as an asset of the beneficiary. If the beneficiary is applying for financial aid, it won't be counted as an asset of the beneficiary. If the beneficiary needs to list his assets for any reason, it is not an asset. There may be times that it is not counted as an asset of the owner, but until the beneficiary dies, the beneficiary changes, or it gets used for the benefit of the beneficiary, I can't think of any time that it's treated as an asset of the beneficiary.
The rules on a Federal level do not say that the money is in the estate of the beneficiary. They say that the "value of any interest" is in the estate of the beneficiary. The logical argument is that this value is zero unless the owner and the beneficiary is the same. The IRC has interpreted it to mean that the money is only in the beneficiary's estate if the money gets distributed. Looking at this combined with the proposed new regs, it is obvious that the IRC certainly doesn't think the beneficiary has an incidence of ownership until the money gets distributed and only if it gets to them or gets moved down a generation.
My guess is that this will remain clear as mud.
Here's a question. If we know that it's not in the estate of the owner and the new regs are going to make it clear that it's not in the estate of the beneficiary (absent certain post death moves), does that mean that if the owner names himself as beneficiary and then dies, this is an uncounted asset?
|
|
Top
|
|
|
|
#43447 - 06/02/08 11:01 AM
Re: Death of a Beneficiary Estate Inclusion
[Re: anonymous]
|
Drew
Registered: 01/09/00
Posts: 2457
|
We most certianly know its an asset of the beneficairy on the day before he dies under federal estate and gift rules---because if its moved its subject to gift tax rules and the special exception of lateral and reverse rules but not downward ones. Other entities or situation are free to apply different rules and state laws as to property transfers may differ from Federal gift/estate tax issues . But the Feds most certainly can write therules to gift/estate to cover 529s. There is no logic to support my interest in a 529 is zero---I may lack control but I sure as heck have an interest--as yet unrealized. Clear as mud I agree.
If would seem to me that if all elements of ownership and control and ominion of a 529 merge then the ability to argue its not to be counted gets very weak as a matter of logic.
But to show you just how illogical stuff about education can be---in my state of PA I can enroll YOUR kid in my local public school if I am taking in your kid to do so "gratis." Now you and I probablyhave a lay view of whats not gratis--how about you pay me $20,000 or $2000 or some readily ascertainable payment to enroll your child in Lower Merion SD as if her were my own. According to an recent appeals decison that arrangement is "gratis"----So if thats "gratis" then I'd expect a similar nonsense answer about a 529 worth a mere 4 years at PSU.
_________________________
Drew
|
|
Top
|
|
|
Moderator: Joe Hurley
|
|
