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| > Investing > College Savings Educator |
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| College Planning Q&A: Splitting a 529 Account |
| by
Susan T. Bart
| 09-23-05 |
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Every month, college-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters.
The purpose of this column is to provide general educational information for investment professionals. For obvious reasons, Susan cannot give advice regarding specific clients or actual matters. Thus, only hypothetical questions, seeking general information, can be answered. Questions that involve real people or real matters will not be answered.
E-mail your questions to advisorquest@morningstar.com.
**Be sure to check out Susan's book, "Education Planning and Gifts to Minors 2004 Edition." Click here for more information.
Q. I have a client that "front-loaded" a 529 account for their first-born child (Child A), born last year. Jointly, that was an initial contribution of $110,000. This year, the clients had a second child (Child B). They don't have sufficient funds to make a large contribution for Child B. Rather, they would like to split Child A's account in half and transfer that to a 529 account for Child B.
Question No. 1: Can they do that? The fund company stated that it would be considered a taxable distribution. However, how is that different than simply changing beneficiaries, just on a portion of the balance?
Question No. 2: How does this affect the parents' ability to make contributions to either child once the split has been accomplished? I know the rule is $11,000 per year, per person, per child. If we removed half of the "gift" to Child A, are the parents still unable to make additional contributions to Child A until year 6? What contributions can be made to Child B's account at this time or during the next several years while we're still within the five years of the original contribution? Or does that even matter for Child B? In a nutshell, does the gift tax exclusion follow the receiving individual or the money?
Susan: Directing that one-half of the 529 account be transferred to a separate 529 account with Child B as the beneficiary should not be considered a taxable distribution. Of course, there's really no hurry to make this change, as presumably Child B won't be ready for college for a number of years.
Under the law as it exists now, the initial contribution to a 529 account for Child A was a completed gift for gift tax purposes, and there are no gift tax consequences to changing the beneficiary of a portion of the funds to Child B because Child B is a "member of the family" of Child A and is in the same generation. Whether or not the parents change the beneficiary over a portion of the account, they have used their gift tax annual exclusions for Child A for a five-year period. Changing the beneficiary of a portion of the funds to Child B doesn't use up any gift tax annual exclusion for Child B. Thus, any additional contributions that they make during the five-year period should be to an account for Child B.
The parents may want to leave the account for Child A as it is for now and open a new account for Child B, making such contributions to the account for Child B as they can afford until the initial five-year period has lapsed. At that time, the parents can compare the values of the two accounts and make any transfer they feel is appropriate to even out the accounts.
Q. If my parents were to set up a 529 plan for the grandkids' education, can they list all of the grandkids on one plan/account or do they need to set up multiple accounts for each of the grandkids? Also, if they need to do the latter, what if that child doesn't go to college? I understand that they can change beneficiaries, but if they already have accounts for the other kids, who would they change it to?
Susan: They need to establish a separate account for each grandchild. If a grandchild doesn't go to college or vocational school, they can change the beneficiary to a grandchild who has higher than expected educational costs (e.g., because the grandchild is going to an expensive school or plans to go to graduate school). Prior to 2011, when certain provisions of Code Section 529 sunset, the beneficiary could be changed from any grandchild of the client to any other grandchild of the client without any income, gift or GST tax consequences. After 2010, unless the changes made to 529 by the 2001 Tax Act are extended, a change of beneficiary from one grandchild to another grandchild who does not share the same parent would be treated as a nonqualified distribution. Thus, without additional legislation, after 2010 a beneficiary change would only be advisable between siblings.
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Susan T. Bart is a partner in the Private Clients, Trusts & Estates Group at Sidley Austin LLP in its Chicago office, where her practice includes estate planning, estate and trust administration, and fiduciary counsel. She has written two books, including Education Planning and Gifts to Minors published by Illinois Institute for Continuing Legal Education (iicle.com), which extensively discusses 529 plans.
She is the author of Education Planning and Gifts to Minors 2004 Edition. She is a frequent speaker on trust and estate topics in general and Section 529 college savings plans in particular.
The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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