UGMA 529 Plan - Funded by Uncle not Account Beneficiary

Angela 2020-01-04 02:01:44 UTC #1

A client opened an UGMA 529 Plan and contributed funds. The account is for his nephew. I don't know why he did this and the Plan will not let us change the account designation.

We understand the account will become owned by the nephew when he turns 21 years old. My question is are there any special tax rules we need to know about since it is an UGMA account. Can we still do the 5 year spread for contributions?

Thanks!

dcandmc 2020-01-04 15:04:29 UTC #2

You can't change the "account designation" because the nephew is the legal account owner now, with a designated custodian (I assume the uncle) managing the account for the nephew's benefit until the nephew reaches the legal age of majority and can take control.

The only special tax rule, as compared to a traditional 529 account, is that the funds can only be used for the nephew's benefit (the beneficiary cannot be changed as can be done with a traditional 529). The five year superfunding of the account can still be done; this has more to do with gift tax law and the annual exclusion amount rules than the type of 529 account (UGMA/custodial vs. traditional).

mark 2020-01-05 13:10:00 UTC #3

Is a benefit of such a plan that the funds will count against the siblings of the nephew on financial aid forms?

dcandmc 2020-01-05 15:59:29 UTC #4

No; because the account is owned by the nephew, the funds in the account will only need to be reported on the nephew's financial aid forms. And on FAFSA, these funds will be reported as a parent asset (more favorable treatment than being reported as a student asset). For colleges that use the CSS Profile form to calculate eligibility for institutional need-based aid, whether funds in a student-owned 529 account are treated as a student asset or a parent asset depends on individual school policies.

mark 2020-01-05 17:19:11 UTC #5

Sorry...I meant to ...will NOT count....

So I think we agree that there is a benefit there since a UGMA 529 plan won't be counted on the financial aid forms of the siblings.

dcandmc 2020-01-05 17:54:17 UTC #6

Yes, that's definitely a benefit of a UGMA/UTMA (custodial) 529 account, in contrast to the account being owned by a parent who has other children that will be looking for need-based financial aid. The big downside is that the account owner/beneficiary is entitled to full control of the account upon reaching the legal age of majority