Titling account to fund 529

[fredricjlowe]

I have a client who is receiving $75,000 from an inheritance. The attorney wants to know how the check should be made payable to deposit into a bank account. The funds will then be directed into a 529. Can it be made payable directly in the child's name, or jointly with his mother, or the mother as custodian for the child? I told her not to have it titled as an UGMA or UTMA since it would have to remain as such even if rolled into a 529.

[dcandmc]

Who is inheriting the $75,000? The child who will be the beneficiary of the 529, or a parent of the child who will be the beneficiary of the 529?

If the child is inheriting and is a legal minor, it would be somewhat surprising to me if the check could even be made payable directly to the child. Instead, I think something like "Parent for the benefit of child," or "Parent as conservator (or guardian) of child" would be more likely. In any event, it's the child's money, and if it ends up in a 529 account, the account would need to be a custodial account (also known as a UGMA/UTMA account), where the child is both the beneficiary and the legal account owner, and a custodian (usually a parent) controls the account until the owner/beneficiary reaches the age of majority.

If the parent is inheriting the money, the check will be made out to the parent and can be deposited in a bank account and the funds can then be transferred to a 529 account that is owned by the parent and names the child as the beneficiary.

[fredricjlowe]

Thank you for your reply.

The 2 minor children will be inheriting the money from their deceased grandmother. The attorney asked his client (the mother of the 2 minor children) on how she would like the checks to be titled.

If the account is setup as a UGMA or UTMA at a bank in order to just to deposit the check with your suggested wording and subsequently is rolled into a 529, my understanding is that the beneficiary couldn't be changed to another beneficiary. The 2 brothers, are inheriting $75,000 each.

I want to allow the opportunity that if either brother might need more money, that it could be taken from the other brother's 529 without penalty or income tax for qualified expenses. My understanding is this would not be possible if it is a UGMA or UTMA 529.

Can you suggest how we could do this by having the check properly titled, deposited into 2 checking accounts, and then each account could be rolled over into respective 529 accounts that are not UGMA or UTMA 529s?

[dcandmc]

Thank you for your reply.

The 2 minor children will be inheriting the money from their deceased grandmother. The attorney asked his client (the mother of the 2 minor children) on how she would like the checks to be titled.

If the account is setup as a UGMA or UTMA at a bank in order to just to deposit the check with your suggested wording and subsequently is rolled into a 529, my understanding is that the beneficiary couldn't be changed to another beneficiary. The 2 brothers, are inheriting $75,000 each.

That's right, the money legally belongs to the child who inherited it. The only person who has the legal ability to decide to use the money for someone else's benefit is the child who inherited the money, and the child won't have the legal capacity to do that until the child reaches the age of majority. Until that happens, the account will be under the control of a custodian, who is under a fiduciary obligation to use the money only for the benefit of the child who inherited it.

I want to allow the opportunity that if either brother might need more money, that it could be taken from the other brother's 529 without penalty or income tax for qualified expenses. My understanding is this would not be possible if it is a UGMA or UTMA 529.

It shouldn't be possible in any circumstances; doing so would be theft. Each brother can have full control of the money once they reach the age of majority as prescribed by the applicable state laws. Once they reach that age, they may choose to give some or all of their inheritance to their brother, or anyone else for that matter. But nobody else can make that decision for them.

Can you suggest how we could do this by having the check properly titled, deposited into 2 checking accounts, and then each account could be rolled over into respective 529 accounts that are not UGMA or UTMA 529s?

The money belongs to the brother that inherited it, and should only be used for that brother's benefit until the brother reaches the age of majority and decides otherwise.