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Why does it matter how many people will benefit from a particular strategy? Many of the topics discussed on FWF are of little interest to anyone other than the OP.

For families in a certain income and asset range, knowledge about how financial aid is calculated might be very valuable. Others might find the information interesting even if their income and assets are too low or too high to benefit from the strategies discussed.

Sesq said:   jimmywalt said:   
For the one going in the fall..... He will get financial aid because his father doesn't have a dime to his name and will be doing the FAS report.


Wait - if you get a divorce you get to pick which spouse "counts" for FAFSA purposes?

With a very trusting/understanding spouse that could really open things up!


Nope. There are very specific rules spelled out about who gets to / has to fill it out in the case of divorced parents. In my son's case, I'm the one who's filing and I am also the one making more.

2Cor521

dhodson said:   I have no problem with the idea that IF people DONT have signficant income and IF they have countable assets then it could work. There just arent as many people fitting that situation.

My experience is to the contrary.

1. That there are significant numbers of families in the $40k to $75k or $100k HHI that have (or are in the process of building) amounts of countable assets that will prove counterproductive when it comes time for their kids to go to college.

2. That it is their tendency to fund their children's 529s -- often at the expense of the parent's underfunded retirement accounts -- that is at the root of their countable assets problem.

I don't know that anyone has done a formal study. So it's really just my conjecture versus yours.

Perhaps there is some future PhD's thesis in there somewhere.

I didn't read all of this but it's conclusions are that few have 529s and those that really do are richer.


http://www.gao.gov/assets/660/650759.pdf

dhodson said:   I didn't read all of this but it's conclusions are that few have 529s and those that really do are richer.


http://www.gao.gov/assets/660/650759.pdf


Thanks for posting. This all seems pretty obvious. It takes disposable income to be able to put money away for college. At lower incomes, there is less of a benefit to using 529 plans and at lower incomes one is less likely to have a child who is going to attend college.

The question, though, is that for those who do save for college, "Does saving money inside of a 529 plan have negative financial aid consequences?" As best as I can tell, both anecdotally and from my knowledge (I am not an expert on the subject)of 529 plans and financial aid, it is often the case that the use of a 529 plan does have negative consequences.

I do think that there are some ways to greatly mitigate this problem even if one chooses to use a 529 plan.

Are Coverdell IRAs considered by FAFSA? Is this a better, though limited, option?

bigdaddycincinnati said:   Are Coverdell IRAs considered by FAFSA? Is this a better, though limited, option?

For dependent students, the FAFSA counts the Coverdell account just like any other parent asset, i.e. just like a 529.

BEEFjerKAY said:   dhodson said:   I have no problem with the idea that IF people DONT have signficant income and IF they have countable assets then it could work. There just arent as many people fitting that situation.

My experience is to the contrary.

1. That there are significant numbers of families in the $40k to $75k or $100k HHI that have (or are in the process of building) amounts of countable assets that will prove counterproductive when it comes time for their kids to go to college.

2. That it is their tendency to fund their children's 529s -- often at the expense of the parent's underfunded retirement accounts -- that is at the root of their countable assets problem.

I don't know that anyone has done a formal study. So it's really just my conjecture versus yours.

Perhaps there is some future PhD's thesis in there somewhere.


Yes, I agree that there is almost no reason to fund a 529 before fully funding every available retirement plan. That is not explained well to middle class families, to their detriment. The exception might be in the case of a rich state tax benefit for 529 funding, but with the increase in countable assets even that is suspect.

I am with Beef, Brody, and dhodson on this one. 529s really benefit the wealthy disproportionately. Frankly I think they're a pretty unconsionable giveaway to the rich, who would save for their kids' college savings with or without the tax benefits.

The other party that benefits is the sell side industry: advisors who earn fees for the direct sales of 529 products, and the fund management companies charging above market fees. Vanguard and other at-cost providers also benefit, though not to the same degree.

If the whole system went away entirely, the middle class wouldn't be hurt at all. Just keep the $2000 ESA and incrementally more revenue would flow to treasury.

psychtobe said:   BEEFjerKAY said:   dhodson said:   I have no problem with the idea that IF people DONT have signficant income and IF they have countable assets then it could work. There just arent as many people fitting that situation.

My experience is to the contrary.

1. That there are significant numbers of families in the $40k to $75k or $100k HHI that have (or are in the process of building) amounts of countable assets that will prove counterproductive when it comes time for their kids to go to college.

2. That it is their tendency to fund their children's 529s -- often at the expense of the parent's underfunded retirement accounts -- that is at the root of their countable assets problem.

I don't know that anyone has done a formal study. So it's really just my conjecture versus yours.

Perhaps there is some future PhD's thesis in there somewhere.


Yes, I agree that there is almost no reason to fund a 529 before fully funding every available retirement plan. That is not explained well to middle class families, to their detriment. The exception might be in the case of a rich state tax benefit for 529 funding, but with the increase in countable assets even that is suspect.

I am with Beef, Brody, and dhodson on this one. 529s really benefit the wealthy disproportionately. Frankly I think they're a pretty unconsionable giveaway to the rich, who would save for their kids' college savings with or without the tax benefits.

The other party that benefits is the sell side industry: advisors who earn fees for the direct sales of 529 products, and the fund management companies charging above market fees. Vanguard and other at-cost providers also benefit, though not to the same degree.

If the whole system went away entirely, the middle class wouldn't be hurt at all. Just keep the $2000 ESA and incrementally more revenue would flow to treasury.


I am going to start a thread on how to fund a 529 while minimizing the negatives.

So I was bouncing around some of the college-specific forums and one concept that seemed to come up a lot was that CSS Profile schools seem to do a lot of "adding back" of assets including business expenses in general and depreciation in particular. Any comments here from those in the know around here about performance of business losses in the CSS setting?

please send the thread on how to fund a 529 while minimizing the negatives.

When withdrawing contributions only from a Roth IRA, are those reported as income on the following year's FAFSA ? I am always confused with the term "distribution" from an IRA if it is a contribution only withdrawal from a Roth IRA.

I created BB&T Collegewealth Savings Account online and funded $4K just few days back. I heard the deadline to fund any VA 529 account to get the tax deduction for 2012 is Dec 31 2012 (end of the calendar year), but not Apr 15, 2013 (unlike IRA/401K). Can I draw $4K from the bank account now and refund them before Dec 31 2013 to get the tax deduction for 2013? Will this process avoid penalty? Experts, please advise.

Anybody who is ineligible (due to income limits) to open a Coverdell account decide to open one in their kid's name and fund the account yearly through a "gift"? The benefit being that the money can be used for private school if you wind up sending them to private school before college.

I haven't done that David because I don't think ESAs are really worth the trouble. Sure, they are mathematically. But $2k per year per child compared to a 529 just ends up being yet another account (per child) to manage.

psychtobe said:   I haven't done that David because I don't think ESAs are really worth the trouble. Sure, they are mathematically. But $2k per year per child compared to a 529 just ends up being yet another account (per child) to manage.I definitely hear that! But, even saving $30,000 per child in an account that can be used for a private high school seems like a good idea -- if they go to a private high school I can tap the ESA...if not, the money can be used for college. And since college may well cost MORE than I can save in a 529 plan, I figure the ESA is a good way to supplement early in case I need to tap the money early for non-colllege educational expenses.

psychtobe said:   wilked said:   Agreed. As of now I think I understand the UTMA strategy as this:

*If you have two or more college-bound children, consider putting any college savings (up to the max allowed in a 529) into a 529 plan under a UTMA for the youngest child. By doing this, the money will be 'shielded' from the FAFSA forms for all older children as they enter college. This allows 529 savings without being 'taxed' the 5.6% for the savings within the FAFSA (until the youngest child enters college, at which point you would have to declare 5.6% of the balance). If instead you 'spread around' the 529 equally into typical accounts, you will get double (or triple or more) penalized, as each year's FAFSA for each child would tax the total 529s, regardless of which child was the beneficiary.



and what happens when your child, at age 18, says, "Hand me the money Dad"?
And my child knows of this account, how? He may have a right to make the demand but without knowing the account exists I find it hard to imagine circumstances where the right gets exercised. When the kid turns 18 does the parent automatically lose the right to direct the account/does the kid have to sign something saying he is aware of it?

BEEFjerKAY said:   psychtobe said:   If it makes sense to consider more advanced strategies closer to college, when FAFSA policies will certainly have changed, we can certainly consider it.

That;s why I consistently recommend not getting too worked up about all of this until your eldest child is in 7th or 8th grades.

Before that time, the key word is "moderation". Don't over fund the 529, don't start a shell business, etc etc. Keep your options open.

Generally, 4-5 years can be enough time to create and implement an effective plan.
Is this really right? I feel like you miss 8 years of tax-free compounding if you don't fund early and heavy. And by funding early and funding heavy isn't that the one way to overcome any tax penalties that may result if you don't have qualified expenses?

DavidScubadiver said:   psychtobe said:   wilked said:   Agreed. As of now I think I understand the UTMA strategy as this:

*If you have two or more college-bound children, consider putting any college savings (up to the max allowed in a 529) into a 529 plan under a UTMA for the youngest child. By doing this, the money will be 'shielded' from the FAFSA forms for all older children as they enter college. This allows 529 savings without being 'taxed' the 5.6% for the savings within the FAFSA (until the youngest child enters college, at which point you would have to declare 5.6% of the balance). If instead you 'spread around' the 529 equally into typical accounts, you will get double (or triple or more) penalized, as each year's FAFSA for each child would tax the total 529s, regardless of which child was the beneficiary.



and what happens when your child, at age 18, says, "Hand me the money Dad"?
And my child knows of this account, how? He may have a right to make the demand but without knowing the account exists I find it hard to imagine circumstances where the right gets exercised. When the kid turns 18 does the parent automatically lose the right to direct the account/does the kid have to sign something saying he is aware of it?


There is probably a legal requirement that once the kid reaches the age of majority that you have to send them a statement about the account... whether people actually do that in practice or not is another thing entirely.

arch8ngel said:   DavidScubadiver said:   psychtobe said:   wilked said:   Agreed. As of now I think I understand the UTMA strategy as this:

*If you have two or more college-bound children, consider putting any college savings (up to the max allowed in a 529) into a 529 plan under a UTMA for the youngest child. By doing this, the money will be 'shielded' from the FAFSA forms for all older children as they enter college. This allows 529 savings without being 'taxed' the 5.6% for the savings within the FAFSA (until the youngest child enters college, at which point you would have to declare 5.6% of the balance). If instead you 'spread around' the 529 equally into typical accounts, you will get double (or triple or more) penalized, as each year's FAFSA for each child would tax the total 529s, regardless of which child was the beneficiary.



and what happens when your child, at age 18, says, "Hand me the money Dad"?
And my child knows of this account, how? He may have a right to make the demand but without knowing the account exists I find it hard to imagine circumstances where the right gets exercised. When the kid turns 18 does the parent automatically lose the right to direct the account/does the kid have to sign something saying he is aware of it?


There is probably a legal requirement that once the kid reaches the age of majority that you have to send them a statement about the account... whether people actually do that in practice or not is another thing entirely.
I doubt there is any such requirement. If there were, they'd make the bank enforce it. Truth is if your kid isn't ready for the money it doesn't matter that he is entitled to it. It would be poor parenting to give it to him. Obviously you have to respect your child's property even if they don't know they own it. But I'd never tell my children they had a pile of money for the taking as soon as they turned 18. Not if I could help it.

I should add -- if you hide the kid's asset from the kid you may wind up with a fight when you later turn it over -- did you mis-invest it, did they have a dire need that you ignored, blah blah blah. So I'd tread lightly here and for that reason probably never set up a UTMA account. But *if* I did set up the account I would be perfectly comfortable not telling my kid that it existed until I felt he was mature enough to handle it.

David, ESA contributions are counted toward the annual gift exclusion, so it doesn't help you with the 529 savings limits.

Remember that the benefit of an ESA is only the incremental benefit over saving the same amount in a 529. That increment might be because of lower expense ratios for the investments, or the ability to use for K-12 expenses. The earlier you use the money the less time for tax-free growth. And the more money you use for K-12, the less is available for college. In other words, an ESA doesn't create more space. If you're worried a 529 won't be large enough because of the accumulation limits of a given plan, open another 529. If you're worried a 529 won't be large enough because of the annual gift exclusion limit, the ESA won't help you.

wordgirl said:   lotusgardener said:   Not everyone lives near a community college.

If there's not a community college nearby, there's not likely to be a traditional 4-year university either. And sending a kid away to attend a community college is still likely to be significantly cheaper than sending a kid away to attend a big university.

The nation's community college system is the true unsung hero of higher-ed in this country, especially as many transform themselves into four-year colleges.


A hidden trap in 529 plans (which I may have fallen into) is that you may overspend on college education. If you have put enough money aside in 529 plans, you are much more likely to let the children go where they want to, even when cheaper alternatives are available. Community college followed by a local university is often sensible, or living at home and going to a nearby good state university. It is a lot harder to decline the expensive alternatives if you have funds set aside (especially if the child knows there is a 529 plan with his name on it.

Yes, if you go to an Ivy League school you do better, but much of that is because you were better, and would have done well where ever you went.

There is a study of those that got admitted to Ivy League schools that asked whether where they went to school made a difference. It turned out that those who turned the Ivy down and went to another college ended up doing just as well (financially).

For instance, I live within commuting distance of the U. of Maryland, and my oldest is clearly gifted. I am told that few Ivy's have large merit scholarships, but apparently the U. of Md. does. It may be hard to tell him to go there if he knows that there is a large pot of money in a 529 plan with his name on it. It might be a little easier if the money was elsewhere (even though you could use it to finance his college).

It may be wise not to let the children know what 529 plans you have. If you choose for good reason to change the beneficiary from one to another, the one whose name was originally on it may feel cheated.

No Ivy League school gives any academic or athletic scholarships. Ivy's only give financial aid.

This year Harvard admitted less than 6% of its applicants. Many applicants with perfect SAT scores and 4.0 GPA's get rejected. If a school rejects 94% of applicants including those applicants with perfect test scores and grades, what would it take to qualify for merit aid if it was actually available?

ryeny3 said:   No Ivy League school gives any academic or athletic scholarships. Ivy's only give financial aid.

This year Harvard admitted less than 6% of its applicants. Many applicants with perfect SAT scores and 4.0 GPA's get rejected. If a school rejects 94% of applicants including those applicants with perfect test scores and grades, what would it take to qualify for merit aid if it was actually available?


Of course who has 4.0 GPA's anymore? The "scholar athlete of the week" I hear on the radio always has a minimum of a 4.7 on a 4.0 scale. The highest I heard was a 5.2 on a 4.0 scale. (how do you get that?) What's the point of a scale if everyone is off the charts - time to move the chart.

Ivy's don't give athletic scholarships, but they do (or did) give much aid to their athletes if they want you. A high school peer of mine went to an Ivy in the early 90's to play football and his total out of pocket was something like $6K/yr (think the retail price of the nut was ~$30K at the time) and his family had lots of money so it was not need based aid.

wilked said:    Granted, the population here is probably already a slice of the upper half of America, but that doesn't mean it is not relevant.

I thought Fatwallet was for students trying to pick up a few dollar in credit card bonuses.

bigdaddycincinnati said:   Now I regret using the recent Gradsave deal to fund my existing 529 accounts. I think I'm stopping my 529 contributions for now (about $40k total currently in the accounts for two kids, 5 and 8) and will funnel the money into Roth IRAs. I think I'll have the ability to temporarily suspend my income during the key years. I wish there was to liquidate these accounts without penalty.

The penalty is only on the gain, so you may lose relatively little should you choose to liquidate.

cheapdad00 said:   ryeny3 said:   No Ivy League school gives any academic or athletic scholarships. Ivy's only give financial aid.

This year Harvard admitted less than 6% of its applicants. Many applicants with perfect SAT scores and 4.0 GPA's get rejected. If a school rejects 94% of applicants including those applicants with perfect test scores and grades, what would it take to qualify for merit aid if it was actually available?


Of course who has 4.0 GPA's anymore? The "scholar athlete of the week" I hear on the radio always has a minimum of a 4.7 on a 4.0 scale. The highest I heard was a 5.2 on a 4.0 scale. (how do you get that?) What's the point of a scale if everyone is off the charts - time to move the chart.

Ivy's don't give athletic scholarships, but they do (or did) give much aid to their athletes if they want you. A high school peer of mine went to an Ivy in the early 90's to play football and his total out of pocket was something like $6K/yr (think the retail price of the nut was ~$30K at the time) and his family had lots of money so it was not need based aid.
I was referring to a 4.0 unweighted average.

Although I have heard rumors about Ivy League schools giving athletic scholarships disguised as financial aid, League rules prohibit athletic scholarships. To the best of my knowledge, none of my child's teammates, many of whom are All Americans, received any athletic aid.

psychtobe said:   David, ESA contributions are counted toward the annual gift exclusion, so it doesn't help you with the 529 savings limits.

Remember that the benefit of an ESA is only the incremental benefit over saving the same amount in a 529. That increment might be because of lower expense ratios for the investments, or the ability to use for K-12 expenses. The earlier you use the money the less time for tax-free growth. And the more money you use for K-12, the less is available for college. In other words, an ESA doesn't create more space. If you're worried a 529 won't be large enough because of the accumulation limits of a given plan, open another 529. If you're worried a 529 won't be large enough because of the annual gift exclusion limit, the ESA won't help you.
Thank you for that. It lead me to google the contribution limits and I read the following from the IRS q/a:

Q. Are there contribution limits?
A. Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $13,000 during the year. For a general discussion of gift tax rules, see IRS Publication 950, Introduction to Estate and Gift Taxes. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

So that leads me to the following question - right now I own my 529 and I am the beneficiary. If I contribute 24,000 to it this year, there can't be gift tax consequences since I can't give a gift to myself... is that right? And if I later change the beneficiary to my son is there a "gift tax" when I make him a beneficiary of a 500,000 account?

Something doesn't add up here. I know that one can freely change beneficiaries, and presumably there is no gift tax for doing so. So why would there be a gift tax if I contributed more than 13,000 during the year but not if I make someone the beneficiary of a $500,000 account in a single year?

dcwilbur said:   I am resigned to the fact that my kids won't qualify for need-based financial aid, so I am saving the maximum amount that I can deduct for state income tax purposes in my home state 529. The rest is in taxable investment accounts in my own name.

It also bears repeating the adage that you can borrow to finance your kid's education, but no one is going to loan you money to retire. Make sure you've taken care of yourself first.


I think this is where I am at as well. My kids are 4 and 6. Based on my salary and the expected inheritance I anticipate from my parents (which based on age and health I estimate will happen before the kids start college) I am writing off any need based aid. I guess I should get busy on the 529 after funding retirement 100%.

DavidScubadiver said:   psychtobe said:   David, ESA contributions are counted toward the annual gift exclusion, so it doesn't help you with the 529 savings limits.

Remember that the benefit of an ESA is only the incremental benefit over saving the same amount in a 529. That increment might be because of lower expense ratios for the investments, or the ability to use for K-12 expenses. The earlier you use the money the less time for tax-free growth. And the more money you use for K-12, the less is available for college. In other words, an ESA doesn't create more space. If you're worried a 529 won't be large enough because of the accumulation limits of a given plan, open another 529. If you're worried a 529 won't be large enough because of the annual gift exclusion limit, the ESA won't help you.
Thank you for that. It lead me to google the contribution limits and I read the following from the IRS q/a:

Q. Are there contribution limits?
A. Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $13,000 during the year. For a general discussion of gift tax rules, see IRS Publication 950, Introduction to Estate and Gift Taxes. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

So that leads me to the following question - right now I own my 529 and I am the beneficiary. If I contribute 24,000 to it this year, there can't be gift tax consequences since I can't give a gift to myself... is that right? And if I later change the beneficiary to my son is there a "gift tax" when I make him a beneficiary of a 500,000 account?

Something doesn't add up here. I know that one can freely change beneficiaries, and presumably there is no gift tax for doing so. So why would there be a gift tax if I contributed more than 13,000 during the year but not if I make someone the beneficiary of a $500,000 account in a single year?


there would be gift tax implications, but there would be no income tax implications or 10% penalty implications.

Also the limit is now $14,000 per year.

DavidScubadiver said:   psychtobe said:   David, ESA contributions are counted toward the annual gift exclusion, so it doesn't help you with the 529 savings limits.

Remember that the benefit of an ESA is only the incremental benefit over saving the same amount in a 529. That increment might be because of lower expense ratios for the investments, or the ability to use for K-12 expenses. The earlier you use the money the less time for tax-free growth. And the more money you use for K-12, the less is available for college. In other words, an ESA doesn't create more space. If you're worried a 529 won't be large enough because of the accumulation limits of a given plan, open another 529. If you're worried a 529 won't be large enough because of the annual gift exclusion limit, the ESA won't help you.
Thank you for that. It lead me to google the contribution limits and I read the following from the IRS q/a:

Q. Are there contribution limits?
A. Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $13,000 during the year. For a general discussion of gift tax rules, see IRS Publication 950, Introduction to Estate and Gift Taxes. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

So that leads me to the following question - right now I own my 529 and I am the beneficiary. If I contribute 24,000 to it this year, there can't be gift tax consequences since I can't give a gift to myself... is that right? And if I later change the beneficiary to my son is there a "gift tax" when I make him a beneficiary of a 500,000 account?

Something doesn't add up here. I know that one can freely change beneficiaries, and presumably there is no gift tax for doing so. So why would there be a gift tax if I contributed more than 13,000 during the year but not if I make someone the beneficiary of a $500,000 account in a single year?


529 plan contributions are considered completed gifts to the beneficiary from a gift and estate standpoint. You are correct that you can't gift to yourself. There is nothing stopping you from putting $300,000 into a 529 plan with yourself as beneficiary.

However, when a beneficiary is changed to someone in a lower generation, it is treated as a gift from the old beneficiary to the new beneficiary. So, when you change the beneficiary to your son in your example, you have made a $500,000 gift to him.

The laws, IMO, are really screwed up with 529 plans in how they are treated from the gift and estate tax standpoint and abuse is easy. The fix to the problem could be fairly easy.

Brody, I am not looking to abuse anything. I just made myself the beneficiary of one account and my wife the beneficiary of another, figuring we could change it to the child as needed. So now we have 2 $20,000 accounts which I just started adding $1,000 a month to... so it looks like I made a tax headache for myself even though I don't have enough assets to worry about estate taxes or estate planning. I think it is ridiculous that making contributions within the gift tax annual exclusion still results in having to file a gift tax return if I change the beneficiary 2 years later. But if that is the case, I suppose it is better to make the change now to minimize the pain (I don't even know if there IS pain, especially if I elect to spread the gift out over 5 years assuming that is permitted). They really ought to warn you when opening the account that making yourself the beneficiary is a bad idea if you are going to eventually change the beneficiary (I did that solely with the thought that if I died it would be better to have the money in my estate so my wife would have the option of using the money herself rather than for college)

It is frustrating that the Instructions for Form 709 don't mention anything about beneficiaries triggering a filing obligation. Lots of things about making contributions on behalf of a beneficiary but nothing about changing the beneficiary. Obviously it makes sense that this is the case but you'd think it would be spelled out in the instructions and not buried in a treasury reg.

Please forgive me if you think that I was accusing you of trying to abuse anything. I was talking about 529 rules in general being ripe for abuse. Those comments had nothing to do with you.

Making yourself the beneficiary isn't some terrible thing. It's not difficult to skirt around gifting issues in the future. If the account is less than $70,000, you can use 5 years of gifts. If it is more, it doesn't have to be done all at once. You could also play games like switching the beneficiary from yourself to your brother and then later switching it to your kid. Then the gift would be from your brother. Switching from you to your brother would have no gifting implications because the generation is the same.

I think that virtually all of the 529 potential for abuse would go away if they weren't treated as a completed gift until AFTER it was actually a completed gift.

DavidScubadiver said:   Brody, I am not looking to abuse anything. I just made myself the beneficiary of one account and my wife the beneficiary of another, figuring we could change it to the child as needed. So now we have 2 $20,000 accounts which I just started adding $1,000 a month to... so it looks like I made a tax headache for myself even though I don't have enough assets to worry about estate taxes or estate planning. I think it is ridiculous that making contributions within the gift tax annual exclusion still results in having to file a gift tax return if I change the beneficiary 2 years later. But if that is the case, I suppose it is better to make the change now to minimize the pain (I don't even know if there IS pain, especially if I elect to spread the gift out over 5 years assuming that is permitted). They really ought to warn you when opening the account that making yourself the beneficiary is a bad idea if you are going to eventually change the beneficiary (I did that solely with the thought that if I died it would be better to have the money in my estate so my wife would have the option of using the money herself rather than for college)

It is frustrating that the Instructions for Form 709 don't mention anything about beneficiaries triggering a filing obligation. Lots of things about making contributions on behalf of a beneficiary but nothing about changing the beneficiary. Obviously it makes sense that this is the case but you'd think it would be spelled out in the instructions and not buried in a treasury reg.

DavidScubadiver said:   Brody, I am not looking to abuse anything. I just made myself the beneficiary of one account and my wife the beneficiary of another, figuring we could change it to the child as needed. So now we have 2 $20,000 accounts which I just started adding $1,000 a month to... so it looks like I made a tax headache for myself even though I don't have enough assets to worry about estate taxes or estate planning. I think it is ridiculous that making contributions within the gift tax annual exclusion still results in having to file a gift tax return if I change the beneficiary 2 years later. But if that is the case, I suppose it is better to make the change now to minimize the pain (I don't even know if there IS pain, especially if I elect to spread the gift out over 5 years assuming that is permitted). They really ought to warn you when opening the account that making yourself the beneficiary is a bad idea if you are going to eventually change the beneficiary (I did that solely with the thought that if I died it would be better to have the money in my estate so my wife would have the option of using the money herself rather than for college)

It is frustrating that the Instructions for Form 709 don't mention anything about beneficiaries triggering a filing obligation. Lots of things about making contributions on behalf of a beneficiary but nothing about changing the beneficiary. Obviously it makes sense that this is the case but you'd think it would be spelled out in the instructions and not buried in a treasury reg.


I have no idea if you could aggregate 5 years of gifts into a single beneficiary change and avoid reporting requirements, but if you can't, you could probably break the current 529 with you as a beneficiary into the number necessary to keep the balance of each plan beneath the annual gift exclusion, then change the beneficiary on each plan in a separate year. Still a PITA but at least when you're done, it's over and you don't have to keep track of how much of your lifetime exclusion you've burned.

BrodyInsurance said:   Please forgive me if you think that I was accusing you of trying to abuse anything. I was talking about 529 rules in general being ripe for abuse. Those comments had nothing to do with you.

Making yourself the beneficiary isn't some terrible thing. It's not difficult to skirt around gifting issues in the future. If the account is less than $70,000, you can use 5 years of gifts. If it is more, it doesn't have to be done all at once. You could also play games like switching the beneficiary from yourself to your brother and then later switching it to your kid. Then the gift would be from your brother. Switching from you to your brother would have no gifting implications because the generation is the same.

I think that virtually all of the 529 potential for abuse would go away if they weren't treated as a completed gift until AFTER it was actually a completed gift.

DavidScubadiver said:   Brody, I am not looking to abuse anything. I just made myself the beneficiary of one account and my wife the beneficiary of another, figuring we could change it to the child as needed. So now we have 2 $20,000 accounts which I just started adding $1,000 a month to... so it looks like I made a tax headache for myself even though I don't have enough assets to worry about estate taxes or estate planning. I think it is ridiculous that making contributions within the gift tax annual exclusion still results in having to file a gift tax return if I change the beneficiary 2 years later. But if that is the case, I suppose it is better to make the change now to minimize the pain (I don't even know if there IS pain, especially if I elect to spread the gift out over 5 years assuming that is permitted). They really ought to warn you when opening the account that making yourself the beneficiary is a bad idea if you are going to eventually change the beneficiary (I did that solely with the thought that if I died it would be better to have the money in my estate so my wife would have the option of using the money herself rather than for college)

It is frustrating that the Instructions for Form 709 don't mention anything about beneficiaries triggering a filing obligation. Lots of things about making contributions on behalf of a beneficiary but nothing about changing the beneficiary. Obviously it makes sense that this is the case but you'd think it would be spelled out in the instructions and not buried in a treasury reg.
LOL, so if I make my brother the beneficiary and don't tell him, and then I make my son the beneficiary, my brother has to pay a gift tax? That's awesome because I hate my brother!

DavidScubadiver said:   BrodyInsurance said:   Please forgive me if you think that I was accusing you of trying to abuse anything. I was talking about 529 rules in general being ripe for abuse. Those comments had nothing to do with you.

Making yourself the beneficiary isn't some terrible thing. It's not difficult to skirt around gifting issues in the future. If the account is less than $70,000, you can use 5 years of gifts. If it is more, it doesn't have to be done all at once. You could also play games like switching the beneficiary from yourself to your brother and then later switching it to your kid. Then the gift would be from your brother. Switching from you to your brother would have no gifting implications because the generation is the same.

I think that virtually all of the 529 potential for abuse would go away if they weren't treated as a completed gift until AFTER it was actually a completed gift.

DavidScubadiver said:   Brody, I am not looking to abuse anything. I just made myself the beneficiary of one account and my wife the beneficiary of another, figuring we could change it to the child as needed. So now we have 2 $20,000 accounts which I just started adding $1,000 a month to... so it looks like I made a tax headache for myself even though I don't have enough assets to worry about estate taxes or estate planning. I think it is ridiculous that making contributions within the gift tax annual exclusion still results in having to file a gift tax return if I change the beneficiary 2 years later. But if that is the case, I suppose it is better to make the change now to minimize the pain (I don't even know if there IS pain, especially if I elect to spread the gift out over 5 years assuming that is permitted). They really ought to warn you when opening the account that making yourself the beneficiary is a bad idea if you are going to eventually change the beneficiary (I did that solely with the thought that if I died it would be better to have the money in my estate so my wife would have the option of using the money herself rather than for college)

It is frustrating that the Instructions for Form 709 don't mention anything about beneficiaries triggering a filing obligation. Lots of things about making contributions on behalf of a beneficiary but nothing about changing the beneficiary. Obviously it makes sense that this is the case but you'd think it would be spelled out in the instructions and not buried in a treasury reg.
LOL, so if I make my brother the beneficiary and don't tell him, and then I make my son the beneficiary, my brother has to pay a gift tax? That's awesome because I hate my brother!


Yep. Not only that, he can really potentially get screwed. How can he do things like make a 5 year election when he doesn't even know that the account exists?

BrodyInsurance said:    You could also play games like switching the beneficiary from yourself to your brother and then later switching it to your kid. Then the gift would be from your brother. Switching from you to your brother would have no gifting implications because the generation is the same.

I/Q]


Thanks. I and my wife have accounts in our own names (because Md. law provides exemptions that are on a per beneficiary basis and we had used up the tax deduction for our children. However, the intention was to use them for the education of our children. I am well enough off so that inheritance taxes could play a role.

Your idea of changing the beneficiary to a brother (or sister) culd be useful. However, I do not wish to hurt them. How likely is doing so likely to hurt them? I think this is only an issue only if it would increase the inheritance taxes for them. Am I right? Unfortunately, it is hard to predict which relatives may be affected by the inheritance taxes (both because predicting the future is hard and because we seldom know much about our relatives current financial situation).

I understand the annual gift tax exemption is on a pair basis (my brother could give $14,000 per year to each of my children). As a practical matter, except for low value gifts at Christmas or birthdays, such gifts are unlikely. Wikapedia says, "Note that each giver and recipient pair has their own unique annual exclusion; a giver can give to any number of recipients and the exclusion is not affected by other gifts that recipient may have received from others."

The potential here is large since I have 4 children and 3 siblings, which is 12 pairs. Thus, large amounts could be transferred each year. What is the best way to do this? Is the election regarding the gift tax automatic (for 5 years), or is it something that either I or they need to explicitly do.

One practical problem I believe would be getting the siblings SS numbers, although I suspect most relatives would be willing to help in this way, at least if there was little risk of substantial cost to them.

It seems that if any more accounts were to be set up, it might be best to make the beneficiary a niece or nephew. Then changing it to your own child is within the same generation.

There might be problems if you wanted to change the beneficiary to a grandchild at some point, but I suppose this might be done in two staqes, first to your child, and then to his child (or would this work).

As I understand it, the beneficiary could then be changed to one of our sons as needed. Am I right on this?

I have seen mention of the potentially bad effects on relatives of beneficiary changes involving them, but I have not heard of it actually happening. Has it happened, or is it just that the IRS has not known of cases where by the wording of the law (crazy) a gift tax might be owed, or a greater inheritance tax owed. It is easy to imagine who ever is doing the inheritance tax forms for someone would not even know that they have been made the beneficiary of a 529 plan.



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