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Subject Author Date
529 Plan Transfer of Ownership jay1000 06-27-2007
Posted by Rich Carreiro on July 5, 2007, 11:51 pm
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> I may be confused but the donee of a 529 (QTP) plan is the
> beneficiary. When one makes a contribution to a QTP the
> rules relating to gift taxes are based on the donor making a
> completed gift to the donee (beneficiary). I don't see how
> there would be gift tax implications just because the owner
> (trustee) is changed.

The owner (trustee) can take money out of the 529 at
any time for any reason (though he'll pay income tax
and a 10% penalty tax on earnings if the distribution
isn't used for the beneficiary's qualified education
expenses).

If the owner can name a different owner of the 529
plan, and if that transfer was not subject to gift
tax, that would create a massive loophole in the
gift/estate tax structure.

I know Congress can be brain-dead, but I doubt
they were that brain-dead. Therefore I'm willing
to bet that:
(a) ownership of a 529 plan can't be changed, or
(b) if it can be, gift tax rules do apply.

--
Rich Carreiro rlcarr@animato.arlington.ma.us

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Posted by joetaxpayer on July 9, 2007, 12:30 am
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 Rich Carreiro wrote:

> If the owner can name a different owner of the 529
> plan, and if that transfer was not subject to gift
> tax, that would create a massive loophole in the
> gift/estate tax structure.
>
> I know Congress can be brain-dead, but I doubt
> they were that brain-dead. Therefore I'm willing
> to bet that:
> (a) ownership of a 529 plan can't be changed, or
> (b) if it can be, gift tax rules do apply.

From pub970;

Changing the Designated Beneficiary

There are no income tax consequences if the designated
beneficiary of an account is changed to a member of the
beneficiary's family (defined above). [a list of 9
relationships follows the cite above]

Rich I agree with your logic 100%, to me even such
flexibility on beneficiaries is opening a door for abuse. Do
you (or anyone here) have any IRS reference that the owner
change is what triggers the gift tax consideration? And if
gift tax applies, does the 5X rule allow a shift of
$60K/owner with no tax?

Just from a logistics standpoint, if I transfer an account
to a cousin as beneficiary, I'd rather not be saddled with
the 'ownership' as well, would it be natural to want to
change the owner to the new beneficiary's parent? Whatever
the case, I'd love to see a definitive explanation of this.

JOE

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by A.G. Kalman on July 9, 2007, 12:30 am
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Rich Carreiro wrote:

>> I may be confused but the donee of a 529 (QTP) plan is the
>> beneficiary. When one makes a contribution to a QTP the
>> rules relating to gift taxes are based on the donor making a
>> completed gift to the donee (beneficiary). I don't see how
>> there would be gift tax implications just because the owner
>> (trustee) is changed.

> The owner (trustee) can take money out of the 529 at
> any time for any reason (though he'll pay income tax
> and a 10% penalty tax on earnings if the distribution
> isn't used for the beneficiary's qualified education
> expenses).
>
> If the owner can name a different owner of the 529
> plan, and if that transfer was not subject to gift
> tax, that would create a massive loophole in the
> gift/estate tax structure.
>
> I know Congress can be brain-dead, but I doubt
> they were that brain-dead. Therefore I'm willing
> to bet that:
> (a) ownership of a 529 plan can't be changed, or
> (b) if it can be, gift tax rules do apply.

I don't know what massive loophole you refer to. Any
contribution to a 529 plan is a completed gift. Until such
time that one changes the designated beneficiary there can't
be any "gift tax" consequences as no gift is made when the
owner or participant (as some plans call the account owner)
is changed. A change in the account owner has no immediate
impact to the designated beneficiary. Distributions may have
"income tax" consequences to the distributee.

The Pension Protection Act of 2006 added Sec. 529(f) that
gives the Treasury Sec'y authority to "prescribe such
regulations as may be necessary or appropriate to carry out
the purposes of this section and to prevent abuse of such
purposes, including regulations under chapters 11, 12, and
13 of this title."

No regulations have been issued. I have no doubt that if
abuse of the 529 rules relating to gift and/or estate taxes
occurs, the regulations would be forthcoming.

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Rich Carreiro on July 12, 2007, 7:34 pm
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> I don't know what massive loophole you refer to.

The massive loophole would be (if changing owners
were allowed) this:
1) I put $N into a 529, with myself as owner/participant
and whoever as beneficiary.
2) Now I change the the owner/participant to someone else.
3) That person takes all the money out as a non-qual
distribution.

If there's no gift tax at step (2), I've just managed to
transfer $N to the other person free of gift tax
consequences.

As for objecting to step (3), at least for MA's 529 plan
(and I suspect all others), the owner/participant is free to
take the money out for any reason, though they'll of course
have to pay income tax and the 10% penalty on any earnings.

> contribution to a 529 plan is a completed gift. Until such
> time that one changes the designated beneficiary there can't
> be any "gift tax" consequences as no gift is made when the
> owner or participant (as some plans call the account owner)
> is changed. A change in the account owner has no immediate
> impact to the designated beneficiary.

At least for MA's 529 plan, the owner/participant *cannot*
be changed. To "change" the participant, the original
participant must close out the account, paying income tax
and the penalty on the earnings, give the money to the
desired new participant (and that's where the gift tax will
come into play) and the new participant will have to open a
new 529 account and contribute back the money.

> Distributions may have "income tax" consequences to the distributee.

To be specific, distributions made to the beneficiary or his
school are taxed to the beneficiary (to the extent they are
non-qualified) and distributions made to anyone else are
taxed to the owner/participant.

--
Rich Carreiro rlcarr@animato.arlington.ma.us

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by A.G. Kalman on July 13, 2007, 5:18 am
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Rich Carreiro wrote:

>> I don't know what massive loophole you refer to.

> The massive loophole would be (if changing owners
> were allowed) this:
> 1) I put $N into a 529, with myself as owner/participant
> and whoever as beneficiary.
> 2) Now I change the the owner/participant to someone else.
> 3) That person takes all the money out as a non-qual
> distribution.
>
> If there's no gift tax at step (2), I've just managed to
> transfer $N to the other person free of gift tax
> consequences.

May be my problem is with "massive." If I want to transfer
X$ to someone else and avoid gift tax, why not just gift the
$12000 to that someone else rather than putting it into a
529 and then changing owners? If I put more than $12000
into the 529, I pay gift tax. Now... someone is going to
bring up the five year rule of gifting $60000 into the 529
plan all at once. I would think that if the owner changes
within the five year period there would be a prorated amount
subject to tax (just as if the donor had died before 5 years
elapsed). If not, then this is an example of abuse that the
Sec'y can fix via the regulation authority granted by
Congress in the Pension protection Act.

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>

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