Let it ride, beneficiary change to next generation and implications

[NLDFriend]

I’m posing this question because I only found partial answers be searching the forum.
Let’s say as a single father, I made contributions totaling $40K to my kid’s 529 plan at birth (within the yearly exemption) and the plan now has an accumulated value of $100K. Due to circumstances, at 22 years the plan value remains unused. I want to change the beneficiary to my kid’s child.

Questions.
1. A beneficiary change from my kid to my kid’s child is, for gift tax reporting purposes, treated as a gift from my kid to my kid’s child and not from me to my grandchild, correct?

1. When I change the beneficiary, for gift tax reporting purposes, is the value of the gift based on the original $40K contribution I made or the current $100K valuation?

2. If I make the beneficiary change for the entire amount in 1 year (rather than yearly increments) will I impose on my kid a requirement to a file a gift tax return to report any amount in excess of the annual gift tax exclusion amount? Assume the kid is unmarried.

3. I understand that some state plans may require disbursement after some time interval. Is it true that there is no 529 federal requirement to force a withdrawal after X years and that I will be able to find state plans that will let the money accumulate indefinitely?

Are there any other questions I should be asking?

PS: I discovered this site decades ago and the advice provided then prompted my participation in 529 plans.

[NLDFriend]

Oops, the questions are miss number, they should be 1-4.

Questions.

1. A beneficiary change from my kid to my kid’s child is,
   for gift tax reporting purposes, treated as a gift from my kid to my kid’s child
   and not from me to my grandchild, correct?

2. When I change the beneficiary, for gift tax reporting
   purposes, is the value of the gift based on the original $40K contribution I
   made or the current $100K valuation?

3. If I make the beneficiary change for the entire amount in
   1 year (rather than yearly increments) will I impose on my kid a requirement to
   a file a gift tax return to report any amount in excess of the annual gift tax
   exclusion amount? Assume the kid is unmarried.

4. I understand that some state plans may require disbursement
   after some time interval. Is it true that there is no 529 federal requirement
   to force a withdrawal after X years and that I will be able to find state plans
   that will let the money accumulate indefinitely?

[dcandmc]

1. No. If you are the account owner, that means that you control the account. You can't impose the role of gift giver on the original beneficiary that you selected, whether they agree to accept that role or not.

2. In my opinion, the gift has already been made when the $40k contribution was made. No gift tax reporting is required because of a beneficiary change.

3. No. As noted above, the original beneficiary has no gift tax reporting requirement if the account owner changes the beneficiary.

4. As far as I know, there is no federal requirement that 529 assets be spent within a certain period of time. You will be able to find state plans that allow 529 assets to accumulate indefinitely.

[NLDFriend]

The answer(s) seem in conflict with other postings I found stating that a change of beneficiaries to a later generation will at minimum requiring reporting if the amount exceeds the exclusion . Has there been a change in the tax law or am I misinterpreting the information.

http://www.savingforcollege.com/articles/20100122-5-ways-to-spend-leftover-529-plan-money?page=2

Anonymous says I'm wrong - it is treated as a gift from the beneficiary. Yet, anonymous cites no legal support for the proposition. But don't worry, if you get audited, you can surely cite the IRS to Anonymous's post. [smile] I am aware of no legal support for the proposition that a change in beneficiary results in a gift from the old beneficiary to the new beneficiary. The old beneficiary never had control over the money or control over the change in beneficiary, so I don't see how it coul…

https://www.bogleheads.org/wiki/529_plan_account_transfers

Changing beneficiaries and generation skipping tax

We have a client who has 2 children without social security #'s. They will get them in 6 months. We would like to set-up 529 plans for the children now, using one parent as owner with the other as beneficiary, and then changing them to the children after they gets their social security #'s. Fidelity (New Hampshire) has said that this is viewed as a "sale" when we change beneficiaries, and they may be exposed to a generation skipping tax. Has anyone heard of this? Are their any other fees fo…

Taxation on beneficiary change to next generation

If a change of beneficiary occurs and a new generation beneficiary{ex.grandchild takes the place of a child of the participant} is established, what are the tax implications at that point?

http://www.fa-mag.com/news/avoiding-section-529-plan-pitfalls-6204.html
http://www.figuide.com/overfunded-college-529-plan-no-problem.html

[dcandmc]

I don't know how or if changing the beneficiary to a lower generation will involve the generation skipping transfer tax. But your main question seems to be, will changing the beneficiary impose gift tax requirements on the original beneficiary. I am confident in saying that the answer to this question is no. Assuming that the original beneficiary is not also the 529 account owner with control over the account, the original beneficiary is not taking any part in making a "gift" when a new beneficiary is designated. Therefore, the original beneficiary is not a gift giver and is not liable for any gift reporting/tax requirements.

[Brian_Boswell_SFC]

@dcandmc is correct: A change of beneficiary does not trigger gift tax rules if it is a member of the immediate family. Contributions to a 529 plan are considered completed gifts except in unusual circumstances (e.g. changing beneficiary to someone that is not a family member). So to change the beneficiary from child to grandchild on a 529 plan without any other changes will have no tax consequences for any of the parties involved.

Brian Boswell
VP, Research & Development

This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.

[aogut]

@sfc_bboswell is there any limit on the amount? what's stopping people from using it to avoid GST beyond $5m? what would happen to my 529 plans for the benefit of my child or grandchild after I die? thank you.