OK this whole thread now has me more confused than before. Sorry for being dense. Here are the points that confuse me:
Parr: You said that the way I did the 5-year election was incorrect. Admittedly, I did it without professional advice, but my understanding for what I did is that it is fine: namely, if you do a 5-year election but dont use up all of the gift tax exemption, you can still in later years use the remaining unused exemption.
Here's a thread discussing this point: http://advisor.morningstar.com/articles/doc.asp?docId=3565
Anon: w/r/t the gift tax question, I think we're all in agreement that unless I pull the money back from the 529 plan, and pay the taxes and penalty, there is zero implication on my federal estate tax. (Parr: I have no idea where I will be long term, so I dont care about state tax issues. Also, Im ignoring the possibility of dying in the next 5 years, which I recognize would have an estate tax implication.)
Lets say that I send my daughter to school, pay proper expenses from the 529, and have a surplus remaining. Then I die with no other kids, and no grandkids. Suppose under the plan I have elected my daughter to be the beneficiary, but that she does not have kids at that time. In this scenario, on my death, the 529 surplus transfers to her, I assume, and she is both owner and beneficiary.
Question 1: Is this a taxable event? Or does the 529 surplus stay inside the tax deferred wrapper?
Question 2: My daughter marries and has a child. Can she make her child the beneficiary of the 529? Would that redesignation be a taxable event? Are there any ways for her to get the money out for her child w/out triggering a taxable event? If her redesignating her daughter isn't a taxable event, isnt the way to pull the money out w/out tax consequence just a question of her daughter going to college?
PS--I also understand that there's a risk if my daughter doesnt go to college that the money can be trapped. I'm less concerned about this risk, b/c my wife and I plan to have more kids, so I'd view the "trap" as requiring a two step parlay, namely that ALL kids fail to go to college.
PPS--Parr, your points about finding other ways to transfer wealth through business expenses etc, are all well-taken, but our household income comes entirely from W2 and investments. We have very little ability to structure our income or find deductions, which is why I'm looking so carefully at the 529 plan as a way to move a lot of wealth into a sheltered (yet semi-reachable) format.