My mom is in an assisted living facility and has to go on medicaid. My brother and mom transferred ownership of my brother's kids accounts to my brother, so my brother is now the owner. He thought it was OK to do but now finding out that the 529 counts as my MOMS asset. My brother cashed the money out. He will have to pay the penalty and the income taxes on this. We are trying to get him to give the money back to my mom (this is a whole other story) If he DOES, does he give her back the money minus the the taxes and penalties?
Do they tax and penalize the EARNINGS or the whole amount? For instance if it was $10,000, but they contributed $5,000 would he pay the tax and penalties on the $5K or the $10K?