529 Owner transfer

[camfused]

Got a couple 529 plan questions for y'all. My wife is listed as the Participant (account owner). My daughter is listed as the beneficiary.

We would like to transfer the ownership from my wife to my daughter.

a) How do we do this?
b) Is there any tax implications to us or my daughter?

We called the administrator but they did not know the answer (to b).

Thanks

 

[coveredbridge]

Can you explain the reason for the transfer? There way be a better way to achieve what you want to accomplish. I'm no tax expert, but I would think that possible tax implications would include 1) gift tax depending on the amount transferred and 2) determining the tax basis in the account for the new owner.

 

[bigreader]

Can you explain the reason for the transfer? There way be a better way to achieve what you want to accomplish. I'm no tax expert, but I would think that possible tax implications would include 1) gift tax depending on the amount transferred and 2) determining the tax basis in the account for the new owner.

Agree that I'd like to understand the reason for the transfer. I don't know if there is a tax issue and but since the money in the account can only be used without penalty for the education of the beneficiary (your daughter), how does a change in ownership help or hurt her situation?


br

 

[camfused]

It’s money for my daughter’s education. She has been through undergrad and is now 25. We just want her to take it over and get out of the loop.

 

[OddGuy]

My parents funded accounts for our kids. They changed ownership to be in my name, with the kids remaining as beneficiaries. It did require some annoying steps with notaries, witnesses, registered mail, etc., but once it was done there were no tax consequences.

They used their financial advisor (ficuciary) to act as a go-between.

 

[SecondCor521]

It’s money for my daughter’s education. She has been through undergrad and is now 25. We just want her to take it over and get out of the loop.

The following assumes your daughter is the beneficiary on the account already (which is the typical setup):

There are no tax consequences. There are no gift taxes. The "basis" (contributions) in the account will transfer to her.

My state does not, but I think some states impose age limits on 529s, so you might check with your state plan and ask about that - your daughter may be required to withdraw the funds by a certain age.

If she goes to graduate school or has other qualified educational expenses, she can withdraw for those tax and penalty free.

If she simply withdraws the money without qualifying educational expenses, she will owe ordinary income taxes on the earnings portion plus generally a 10% penalty on the earnings portion. The 529 people should be able to tell you approximately how much is earnings. I was able to find it by looking at the transaction detail on my withdrawals and it was split out there - withdrawals are always treated as prorata between contributions and earnings, so it does change over time as the account fluctuates in value and contributions and withdrawals are made, but if the 529 people can't tell you then the transaction detail will at least give you a ballpark figure.

There are exceptions to paying the 10% penalty. The one I am aware of is if the student had received scholarships.

 

[cbo111]

My parents funded accounts for our kids. They changed ownership to be in my name, with the kids remaining as beneficiaries. It did require some annoying steps with notaries, witnesses, registered mail, etc., but once it was done there were no tax consequences.

They used their financial advisor (ficuciary) to act as a go-between.

+1. We just did the same with three kids and four grandkids. Aside from having to track down a notary, it was easy. Now the kids are responsible to manage their children's college funds. We gave them a good start, now hopefully they will add a bit to the funds now and then. There was no tax implication.

 

[athena53]

If your daughter has no more need for educational spending, there may be a circuitous way to "get the money out" but I'm just pulling this out of the air and I'm not a tax accountant- or any kind of accountant. I hope people with more expertise will comment.

It can be transferred to another family member without penalty- "family" includes first cousins, etc. See this article.

https://www.merrilledge.com/ask/college/can-you-transfer-or-rollover-529-plans

Find someone who qualifies as family under the definition who's still attending and paying for college (or secondary school, which 529s can cover). Transfer it to them and they pay you maybe 90% of the value. That way you avoid taxation on the amount (although you're giving them the equivalent of the 10% penalty) and they get a "discount" on their education. Not sure what this would do to their eligibility for financial aid, though.

 

[camfused]

Thanks all. She is kicking around going for more schooling, so it should stay with her, at least for now.

 

[camfused]

...See this article.

https://www.merrilledge.com/ask/college/can-you-transfer-or-rollover-529-plans

The way I read that, it it talking about changes to the beneficiary. She already is the beneficiary. We want her to be the OWNER.

 

[camfused]

+1. We just did the same with three kids and four grandkids. Aside from having to track down a notary, it was easy. Now the kids are responsible to manage their children's college funds. We gave them a good start, now hopefully they will add a bit to the funds now and then. There was no tax implication.

Ok, so now they are the beneficiary AND the owner?

 

[SecondCor521]

Ok, so now they are the beneficiary AND the owner?

You missed a generation. The poster is a grandparent who started a 529 for their grandkid(s) and then shifted custodianship to the parents. Grandkid(s) are still the beneficiaries.

Although a person can be both the owner and the beneficiary. I made contributions to my own 529 then disbursed for my graduate school classes. I got the tax deduction for moving the money through the 529.

When my kids are close to graduating, I plan to make them the owner of their 529s. They can then either save it for their own grad school, save it for their kids' college educations, or take it out, pay some taxes, and use it for whatever (house down payment, car, wedding, rent before first job).

 

[camfused]

^^^^ Yes, I mis-read. Thanks. And, that is what I am doing with my daughter. I basically put in too much money for what she is likely going to need, so she can do what she wants with it. As for grad school, money won't be the excuse for not going.

 

[sengsational]

I also have an over-funded 529 account for my daughter. She is entertaining the idea of going to grad school. I never thought about making her the owner. I just give her a report of what's in the account every so often, and give her the choice of how it's invested. After undergraduate, I figured it would be for her kids (has none, not married, but might happen some day). Anyway, went 100% equities. Then she said she was interested in grad school in the next 5 years, so it went back into the "college portfolio". Transferring ownership is not a bad idea, if I wanted "out of the loop". But I guess I don't mind being in the loop because I've worked with 529 accounts in the past, and operating with them can be a bit confusing, so I prefer to stay in the loop, just to help manage it (it's our family against the technicalities, nuance and rules of the bureaucracy, hehe!). Here's a link to a question/answer about overfunded 529s: https://money.stackexchange.com/que...-good-strategy-for-an-over-funded-529-account

 

[Brat]

I have a variation on this issue. We have 529 accounts for our grandchildren DH is the 'owner' of each account. The program has provision for a successor owner on each account. Because DH owns an account I do not belive that it must be included in a FAFSA. Would it be wise to have the successor owner the aunt/uncle of the grandchild should he pass?

 

[SecondCor521]

I have a variation on this issue. We have 529 accounts for our grandchildren DH is the 'owner' of each account. The program has provision for a successor owner on each account. Because DH owns an account I do not believe that it must be included in a FAFSA.

The 529 does not need to be reported on the FAFSA as an asset if it is owned by a grandparent (except perhaps in the odd case where the grandparent is also the custodian of the grandchild).

However, any distributions from the 529 are considered tax free income to the student in the year disbursed. So it is usually recommended to save "grandparent 529s" for the penultimate year or the final year of college.

Would it be wise to have the successor owner the aunt/uncle of the grandchild should he pass?

It would be wise to have a successor owner listed. An aunt or uncle works, and it would be treated the same as a "grandparent 529" for financial aid purposes as noted above.

...

Note that FAFSA is only for government aid and many public universities. There is a completely different financial aid system called CSS Profile, which is used by many of the more competitive liberal arts schools. CSS Profile may treat 529s differently - I'm not familiar with it since all my kids are at FAFSA schools. CSS Profile seems harder to "game" than FAFSA.