Transfers to Second Cousins?

[Javajo56]

Just suppose a Trust owns multiple 529s The Trust is supporting the education of 42 beneficiaries, all descendents of the nieces and nephews of a deceased couple. So lots of second cousins. Most beneficiaires clean out there available funds, but a few have left money unspent. What happens if the Trust transfers funds from one nieces grandchild to a different nieces grandchild (both beneficiaries, but second cousins not first)? Does it make sense to make transfers up the family tree back to grandma and her sister and then to the grandchild?

[dcandmc]

A second cousin is not considered a "member of the beneficiary's family" under the 529 rules. A distribution/transfer to a second cousin would incur taxes on the earnings portion of the distribution, plus the 10% additional tax (penalty). The idea of making transfers up the family tree through three generations and then back down the family tree through three generations makes my head hurt. That's a lot of work, with tax implications of its own.

[RFSizemore]

How about a beneficiary change, where the change is (technically, truly) to a first cousin, once removed? The current beneficiary is my son. I'm thinking about changing the beneficiary to the daughter of my niece. Or, if the "once removed" means "not a family member", can I change the beneficiary to be my niece, and then later change it to be her daughter?

[dcandmc]

The IRS does not designate a first cousin once removed as an eligible member of the beneficiary's family. I have not heard of any prohibition to the step process you ask about (from your son to his cousin and then to the cousin's daughter).