Are there gift or other taxes triggered if I transfer ownership of my kid's 529 from me to my ex?-wife (the mother and currently Successor owner

dankerrigan 2018-09-20 19:39:09 UTC #1

I'am divorced. Read article recently that FAFSA penalizes me if I am owner of 529 but not primary custodian. If I make ex-wife (mother and currently successor owner) the owner, do I trigger or other taxes?

dcandmc 2018-09-21 01:28:21 UTC #2

I don't understand what you mean by "owner but not primary custodian." Please explain.

dankerrigan 2018-09-21 17:20:02 UTC #3

According to recent article I read that quoted a Saving4C writer with whom I also spoke, in case of divorced parents, one is the "custodial parent" who also fills out the FAFSA. that parent is determined by where the kid mostly resides. Even leap years come into play. Better if that parent is also the owner. (similar situation arises w/grandparent-owners at distribution stage). So I am thinking of changing ownership from me to my ex-wife (she is now Successor Owner) and making me Succ. Owner. Is the above correct, and DOES changing ownership trigger gift tax? Thanks, Dan

dankerrigan 2018-09-21 17:38:12 UTC #4

Mark Kantrowitz of SFC was the quoted guy with whom I telephonically spoke, but at the time I hadn't thought about asking about gift tax.

dcandmc 2018-09-21 19:46:04 UTC #5

Ok, I understand the context of "custodian" now. I thought you were talking about custodian of the 529 account, but apparently you were talking about custodian of the student in terms of FAFSA.

I don't think there are any gift implications if the 529 account ownership is changed, as long as the beneficiary isn't also changed.

Something to think about: as the non-custodian parent for FAFSA purposes, if you retain 529 ownership and can wait until your child finishes the first semester of sophomore year before using funds from the 529, you can avoid any financial aid impact. (This assumes that your student will start college in a fall semester and finish in four successive academic years.)

dankerrigan 2018-09-21 20:18:47 UTC #6

It's confusing in that the divorce document says we have equal custody. but Mark K points out FAFSA doesn't and in my case the kids clearly spend more time at her house. Unlike some divorces, I trust that she'll use the money for Harvard, not a Harley! I'm sure a big issue with some. I may draw up a private agmt between us anyway, but more worried about tax implications than her blowing the money. And I'm not a lawyer and don't know if agmt that the money is only for college would stand up. Thanks very much!

dankerrigan 2018-09-21 23:05:04 UTC #7

One last thing. You seem very qualified but no one is willing to commit to tax questions. Even American Funds, one of the top 3 fund companies in the US and they only cover their culo. Now that I got this far on the FAFSA issue, I'm am very surprised that no one seems to be sure about the Ownership and taxation issue. The issue is not that arcane and seems to affect any divorced parent or grandparent.

dankerrigan 2018-09-21 23:20:14 UTC #8

One more last thing. I can tell you understand my issue as you suggest using the money there later as it espec comes into play for me or the grandparents. Doubt I'll have that luxury. even Am Fds which doesn't give out tax advice and hypocritically does including advising grandparent money (in their printed literature) and other things. I'd call that tax advice. Since I trust my ex-wife and the mother with becoming the owner, I think my only issue is gift tax unless there's something I haven't thought of. Beneficiary will not change. Thanks, Dan

dcandmc 2018-09-22 02:54:21 UTC #9

FAFSA doesn't care what the divorce document says; the first thing that matters is with which parent the student spent the most time in the 365 days preceding completion of FAFSA.

The way that the legal concept of gifts and gift tax has been applied to 529 accounts is very unusual, and I would even say unique. Money contributed to a 529 account is considered a completed gift to the named beneficiary, even though the account owner maintains control of the money in the account to the point that the account owner can name a different beneficiary, including him/herself, or take out the money to use for him/herself. As far as I know, no other type of gift is treated this way under the tax code.

dankerrigan 2018-09-22 17:22:20 UTC #10

Thank you for your very helpful and thorough answer. May I ask you why you know the subject so well and secondly can I ask that you send me your Contact info? Thanks, Dan Kerrigan