• Go to page :
  • 12 3
  • Text Only
Xerty, as long as it is a relatively small amount of money, I would agree with you.

Brody, your son can not name me as beneficiary on a 529 that he owns because I am not an eligible family member.

My job is hard enough as it is; and nobody is paying me to look out for the public fisc. That said, I take compliance with the laws of my guest country very seriously. I would never suggest that anyone do anything that even violated the spirit of the laws of the United States (see my comments on an s-corp paying a small wage to the s-corp-owner in another thread). And yes, I am familiar with the step-transaction doctrine.

Ultimately, nobody should be messing around with SNT planning without an attorney (backed by adequate E&O insurance) playing quarterback. There are many more issues involved beyond the tax consequences.

Brody, my canned response is usually "if the tax consequences freaks you out, get a Private Letter Ruling". That said, the black letter law is pretty clear, so don't be shocked if they decline to respond and you forfeit your PLR fee.

"Eligible family member" only relates to changes of beneficiary. There is nothing that stops me from naming a non relative as beneficiary.

Brody, a review of the rules reveals that you are correct.
What an egregious loophole.
If I had representation, I would hound my congressperson to have this changed.
Sadly, I pay taxes without representation, and will continue to collect fees from those who take advantage of this egregious loophole. (to pay both my tax bill and to feed my kids)

(apparently, FW won't let me -1 my own previous message in this thread)

So, do we all have this straight? Don't waste money on VA M&E as long as you can get ahold of the date of birth social security number, full name, and address of some disabled person; and you get access to the documentation supporting said disability.

sesat said:   
The penalty waiver is not intended to apply to a beneficiary who BECOMES disabled; it applies where the beneficiary IS disabled, regardless of the sequence of events (bene disabled, then 529 funding VS 529 funding, then bene disabled).


I'd have to quibble with you there. I'm not sure how you are so confident in your knowledge of the intent of the waiver.

The code states: (B) Exceptions
Subparagraph (A) shall not apply if the payment or distribution is—
...
(ii) attributable to the designated beneficiary’s being disabled (within the meaning of section 72 (m)(7))


So, no additional tax if the distribution is attributable to the beneficiary being disabled. I can't definitively divine the intent, but it seems more reasonable to infer that the exception contemplates that the account is set up for the beneficiary's future educational expenses, but if the beneficiary's being disabled causes alternative needs/uses for the money to be distributed (i.e. there will no longer be educational expenses as previously anticipated, or due to disability related expenses for example), then the penalty will be waived. I think this is more likely than that the waiver was intended so that funds can be put in the plan for a disabled beneficiary for whom there is no intention to pay future educational expenses, but rather to use it as tax deferred vehicle for future distributions related to the disability. That's just my opinion, and I'm not a lawyer.

That being said, I think I agree with both Brody and sesat.

I think it is pretty clear that the penalty exception does not apply if I set up an account with Brody's disabled neighbor as the beneficiary, and then distribute it to myself after 20 years of tax deferral and spend it on H & B (i.e. the distribution has no relation to the disabled neighbor - other than my believe that it has magically waived the penalty).

However, if the funds are distributed so that the money can be used to pay for Brody's neighbor's disability related expenses, as sesat has implied with the SNT, it seems the result (unintended - in my opinion) would be waiver of the penalty since the distribution is attributable to the beneficiary being disabled.

Just be aware that Union First credits interest every quarter and BB&T every "statement cycle". If you withdraw before the interest credit date, neither pays accrued interest. To withdraw your money, you have to go through "Virginia College Savings Plan"--no idea how much delay that step may entail. If they drastically drop their rate after a month, you would have the option of losing all interest until you get your money back, or let it sit at a lower rate until quarter/"statement cycle" end, and then try to withdraw it as quickly as the process would allow.

lcbhandari said:   Just be aware that Union First credits interest every quarter

The T&C pdf that I saved says otherwise: "Compounding and Crediting Frequency – Interest will be compounded every month. Interest will be credited to your account every month. "
What is the source of your info please?

sesat said:   Brody, a review of the rules reveals that you are correct.
What an egregious loophole.
If I had representation, I would hound my congressperson to have this changed.
Sadly, I pay taxes without representation, and will continue to collect fees from those who take advantage of this egregious loophole. (to pay both my tax bill and to feed my kids)

(apparently, FW won't let me -1 my own previous message in this thread)


It's not an egregious loophole because, IMO, if the IRS challenges someone who put the money into the account of someone who was already disabled, the person would lose the case and would end up paying a penalty. If the IRS doesn't audit, a person can get away with anything.

The primary loophole in 529 plans is that they are counted as completed gifts when they are quite obviously not completed gifts. There is a fairly easy fix:

Change the rules so that they reflect reality. The contributor is only making a completed gift, at the time of the gift, if they are not the owner of the account. The owner is only making a gift once they give up control of the account.

Ex. Jim opens up an account for his daughter, Julie.
Jim contributes $20,000. No gift has taken place. The account grows to $30,000. This money gets pulled out to pay for school. There is still no gift because one can spend unlimited money for their child/grandchild's schooling without gifting implications.

Ex. Julie doesn't go to college. Jim decides to let Julie keep the 529 money. He has now made a $30,000 gift to her.

If the contributor is not the owner, it is a completed gift, but the gift is to the owner as opposed to the beneficiary.

Ex. Charlie, Jim's dad, decides to make a contribution to the 529 plan. His contribution is treated as a gift to Jim and not to Julie.

This makes sense to me because the owner has complete control of the money and has no obligation to use the money for the beneficiary.

If the beneficiary owns the account, typically an UTMA 529, then it would be a completed gift to the beneficiary because the money legally belongs to the beneficiary and must be used for them.

One should not be able to make a completed gift and remain in control.

And now we have drifted completely off the topic of "Effectively 2.07% savings account FDIC insured $10k+ into "tax law consequences of estate planning for the disabled".

Cristo said:   And now we have drifted completely off the topic of "Effectively 2.07% savings account FDIC insured $10k+ into "tax law consequences of estate planning for the disabled".

Actually, it is still the same topic. The "drift" is about how to take advantage of this and take out the money without having to pay a penalty. If the beneficiary becomes disabled, there is no penalty.

Along the same lines, one can set up a plan for somebody very old and sick. There is no penalty for removing the money at death of the beneficiary.

So what is the consensus regarding naming a beneficiary if the intent is to use this as a personal savings account? List yourself or a child? Whittaker's comments confused this decision.

jacbot said:   So what is the consensus regarding naming a beneficiary if the intent is to use this as a personal savings account? List yourself or a child? Whittaker's comments confused this decision.

It's irrelevant who is named. The only suggestion that I would have is that if it might be used for a particular beneficiary to name that person right away. That way, the size of the gift will be the contribution instead of the contribution plus the growth.

BrodyInsurance said:   sesat said:   Brody, a review of the rules reveals that you are correct.
What an egregious loophole.
If I had representation, I would hound my congressperson to have this changed.
Sadly, I pay taxes without representation, and will continue to collect fees from those who take advantage of this egregious loophole. (to pay both my tax bill and to feed my kids)

(apparently, FW won't let me -1 my own previous message in this thread)


It's not an egregious loophole because, IMO, if the IRS challenges someone who put the money into the account of someone who was already disabled, the person would lose the case and would end up paying a penalty. If the IRS doesn't audit, a person can get away with anything.

The primary loophole in 529 plans is that they are counted as completed gifts when they are quite obviously not completed gifts. There is a fairly easy fix:

Change the rules so that they reflect reality. The contributor is only making a completed gift, at the time of the gift, if they are not the owner of the account. The owner is only making a gift once they give up control of the account.

Ex. Jim opens up an account for his daughter, Julie.
Jim contributes $20,000. No gift has taken place. The account grows to $30,000. This money gets pulled out to pay for school. There is still no gift because one can spend unlimited money for their child/grandchild's schooling without gifting implications.

Ex. Julie doesn't go to college. Jim decides to let Julie keep the 529 money. He has now made a $30,000 gift to her.

If the contributor is not the owner, it is a completed gift, but the gift is to the owner as opposed to the beneficiary.

Ex. Charlie, Jim's dad, decides to make a contribution to the 529 plan. His contribution is treated as a gift to Jim and not to Julie.

This makes sense to me because the owner has complete control of the money and has no obligation to use the money for the beneficiary.

If the beneficiary owns the account, typically an UTMA 529, then it would be a completed gift to the beneficiary because the money legally belongs to the beneficiary and must be used for them.

One should not be able to make a completed gift and remain in control.


the rules that you quoted there, that's just your proposal (as opposed to the actual law), right?

There would be a benefit to setting this account up for a beneficiary before the end of the year, right? Reason that I say this is because you would be avoiding some sort of annual gift limits, right?

What are the pros and cons of opening the account under another state (VA was referenced in this thread, I live in PA).

tennis8363 said:   There are caps on lifetime contributions:

"Each state determines its own lifetime contribution limit, ranging between $100,000 and $270,000."

http://money.cnn.com/pf/college/features/529plan/


This is not correct. Each state sets its own limits as it sees fit. Many states allow unlimited contributions until the account reaches a certain size, but you can see that is not quite the same thing as limiting contributions.

For example, this is from Utah's 529 website:

UESP will accept contributions until all UESP account balances for the same beneficiary reach $390,000. However, balances may exceed this amount as a result of market performance. This amount may be adjusted annually by UESP.

For this Virginia 529, I'm not sure the plan means what it says, but the FDIC limit seems more relevant anyway:

All Virginia College Savings Plan 529 Accounts have a maximum aggregate contribution limit per beneficiary of $350,000.

Contribution Limits
"$350,000 contribution limit for each Beneficiary across all Virginia 529 plans.
Multiple accounts for the same Beneficiary will be combined to determine if the maximum contribution amount has been reached. The plan will not accept additional contributions once the total balance on all accounts for the same Beneficiary reaches
$350,000 (including any earnings)."

Silverthunder said:   BrodyInsurance said:   sesat said:   Brody, a review of the rules reveals that you are correct.
What an egregious loophole.
If I had representation, I would hound my congressperson to have this changed.
Sadly, I pay taxes without representation, and will continue to collect fees from those who take advantage of this egregious loophole. (to pay both my tax bill and to feed my kids)

(apparently, FW won't let me -1 my own previous message in this thread)


It's not an egregious loophole because, IMO, if the IRS challenges someone who put the money into the account of someone who was already disabled, the person would lose the case and would end up paying a penalty. If the IRS doesn't audit, a person can get away with anything.

The primary loophole in 529 plans is that they are counted as completed gifts when they are quite obviously not completed gifts. There is a fairly easy fix:

Change the rules so that they reflect reality. The contributor is only making a completed gift, at the time of the gift, if they are not the owner of the account. The owner is only making a gift once they give up control of the account.

Ex. Jim opens up an account for his daughter, Julie.
Jim contributes $20,000. No gift has taken place. The account grows to $30,000. This money gets pulled out to pay for school. There is still no gift because one can spend unlimited money for their child/grandchild's schooling without gifting implications.

Ex. Julie doesn't go to college. Jim decides to let Julie keep the 529 money. He has now made a $30,000 gift to her.

If the contributor is not the owner, it is a completed gift, but the gift is to the owner as opposed to the beneficiary.

Ex. Charlie, Jim's dad, decides to make a contribution to the 529 plan. His contribution is treated as a gift to Jim and not to Julie.

This makes sense to me because the owner has complete control of the money and has no obligation to use the money for the beneficiary.

If the beneficiary owns the account, typically an UTMA 529, then it would be a completed gift to the beneficiary because the money legally belongs to the beneficiary and must be used for them.

One should not be able to make a completed gift and remain in control.


the rules that you quoted there, that's just your proposal (as opposed to the actual law), right?


Correct. What I said was about my proposal and has nothing to do with the current law.

naas said:   lcbhandari said:   Just be aware that Union First credits interest every quarter

The T&C pdf that I saved says otherwise: "Compounding and Crediting Frequency – Interest will be compounded every month. Interest will be credited to your account every month. "
What is the source of your info please?

Here are my sources:

For Union First--from "Support" tab - Find "Truth in Savings Disclosure". On the very first page, under "COLLEGE WEALTH® 529 SAVINGS ACCOUNT" it states "Compounding and crediting frequency - Interest will be compounded every quarter. Interest
will be credited to your account every quarter."

For BB&T--at the information page linked from this thread--look at the bottom under "Resources" for "PDFs" and go for the "....Savings Agreement" document. Deep inside this document (page 11 of 22 pages)--it states "Interest is compounded daily and credited on the last day of the statement cycle, with one exception. If your account is closed before interest is credited, you will not receive the accrued interest."

Thanks for that info. My document is from Personal Banking -> CollegeWealth (529) -> CollegeWealth® 529 Program Description (at the bottom under the application link)
Your document says at the very end "rev. 8/10" and mine at the top says "as of December 1, 2010"
Who know what they will do?

I just opened up the bbt one. I figure it is a good emergency. What is the length of statement cycle. To get over 2 percent in a liquid account seems safe and better than using ally .95 percent account

naas said:   Union First makes you authorize a credit pull. Has anyone checked whether it's hard or soft yet?I just didn't check that box, so as to not authorize a credit pull. I have my account open. Not sure if they actually pulled or not, because I haven't gotten a copy of my credit report since.

d'oh. I should have thought of that.

Has anyone looked into the rules for changing beneficiaries?

PQSteve said:   Has anyone looked into the rules for changing beneficiaries?

What would you like to know? Basically, a new beneficiary of a 529 plan must be related to the previous beneficiary. If the new beneficiary is of a lower generation (ie old beneficiary's kid or nephew/niece), it is a gift from the old beneficiary to the new beneficary.

lcbhandari said:   Here are my sources:

For Union First--from "Support" tab - Find "Truth in Savings Disclosure". On the very first page, under "COLLEGE WEALTH® 529 SAVINGS ACCOUNT" it states
"Compounding and crediting frequency - Interest will be compounded every quarter. Interest will be credited to your account every quarter."
The info above comes from this document, where the statement lcbhandari quoted (which I highlighted) appears directly within the COLLEGE WEALTH® 529 SAVINGS ACCOUNT section of that document.

However, if you proceed to open a 529 plan at the Union First web-site, the first step in the process requires you to acknowledge reading the following two disclosures:


The 2nd disclosure above opens up a documented titled "CollegeWealth® 529 Savings Account Truth-in-Savings Disclosure," which states:
Compounding and Crediting Frequency – Interest will be compounded every month. Interest will be credited to your account every month.
So Union First has contradictory information documented on their web-site for COLLEGE WEALTH® 529 SAVINGS ACCOUNTS.

Some plans / accounts have additional restrictions on the frequency of changes and the time the account has been open before making a change. E-mailed BB&T and got this response:

E-Mail Support is not authorized to assist you in this specific matter due to the complexity of the account type. We do apologize for the inconvenience.

However, you may contact BB&T Investment Services at 800-453-7348 for additional information.

Routed to 3 different CSRs.... They said they will call me back.

PQSteve said:   Some plans / accounts have additional restrictions on the frequency of changes and the time the account has been open before making a change. E-mailed BB&T and got this response:

E-Mail Support is not authorized to assist you in this specific matter due to the complexity of the account type. We do apologize for the inconvenience.

However, you may contact BB&T Investment Services at 800-453-7348 for additional information.

Routed to 3 different CSRs.... They said they will call me back.


... got a callback. No restrictions on beneficiary changes other then normal 529 rules.

for BBT.com, do you guys know the transfer limits. It seems you can put $2k/day up to $5k monthly. What are the limits out?

Re: BBT

These are not regular accounts, so you can't just transfer funds out.
You must go thru a third party, the Virginia state adminstrator, sending the state administrator a fax or letter. Then, usually within 2 weeks, they notify the bank (BBT) who then mails you a check. So the withdrawl process is quite slow, ~2-3 weeks.

sesat said:   529's are used in special-needs planning all the time, because of the penalty-free withdrawals for non-qualified expenses.
As an estate planning tool, they allow the grantor/trustee to remain firmly in control, while qualifying for the annual transfer-tax exclusion. Furthermore, they can use stack 5 years of annual-exclusions in a single year.
That's rocketfuel for an inter-vivos special needs trust.


A bit off topic, but I have a question for you on this. When we set up our wills to include a testamentary special needs trust for one of our kids, we were advised to transfer the beneficiary of the 529 plan from the child to the parent, so that the funds would be included in the estate and would pass into the testamentary trust. Leaving it in the child's name presented a risk that the funds in the plan would transfer directly to the child if both parent's died, bypassing the special needs trust. The risk of setting the beneficiary as the parent is the gift limit issues if things go better than expected and the child could use the money for school down the road, but we're not talking about huge amounts of money here - about $25k at this point (child is 7). What would be your recommendation in this situation?



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

TRUSTe online privacy certification

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2014