$12k gifts - cash vs 529 acct

thinking about our grandparents yearly "gift" of $12k....to lessen their estate holdings...

Comments on whether it's better to put some into a 529 acct for each kid that was established by the grandparents.... or just hand over the $12k ?

They previously had put a portion each year into the respective kid's 529 acct, and then the rest was given as birthday + xmas presents....

Reply to
P.Schuman
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Missing data - how old are the grandkids? Is there any issue about someone else controlling the money? i.e. a 529 cannot be spent by the beneficiary, it is controlled by the account owner. Easy way to shift things around. And the 529 has a tax advantage the outright gift does not. If the estates are really huge, grandparents can gift ahead up to 5 years with no gift tax issue. JOE

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Reply to
joetaxpayer

I am a grandparent that has just recently set up a 529 College Plan for three grandchildren ages, 2, 4, 6. We did so not for any Estate Tax considerations, but to aid in the cost of each child's education. My wife and I control the funds which must be used for tuition, books, fees and other costs attributable strictly for college. The money in the accounts accumulates on a tax free basis and is not taxable when withdrawn if used for the preceding reasons. The 529 precludes misuse of the funds by either the parents or the grandchildren. If for some reason they do not go to college, the funds can be withdrawn, given to the children, and is taxable to them. We deposited into three separated accounts with Vanguard, lump sums, and will not be making any further contributions.

Reply to
Lon

*only the growth is taxed. That growth is subject to 10% penalty unless you qualify for an exception to the penalty. The exceptions relate to withdrawals made on account of the beneficiary's death, disability, receipt of a scholarship, or attendance at a Unites States military academy. A limited exception also exists for families claiming a Hope credit or Lifetime Learning credit since those credits act to reduce your qualified higher education expenses.

JOE

Reply to
joetaxpayer

Also, if a child does not go to college (or doesn't spend all of the funds at college) you can change beneficiaries of the account to another qualifying family member.

Reply to
kastnna

Depending on the age of the children the kiddie tax may factor into this decision. If the money keeps landing in an UGMA/UTMA account and these are young children, who you expect will attend college, you may set up some kiddie tax problems that last all the way through school.

How old are they, how much money would be accumulated?

-Tad

Reply to
Tad Borek
[529 - change of beneficiary]

Question regarding this - some older publications indicate that there was a potential GST and/or gift tax consequence to a change of beneficiary where it also changed generations (ie. change from your son to your grandson).

Current doc I found in IRS pubs (p970) says nothing about this. Has this reg changed or have I missed something?

Reply to
BreadWithSpam

Last I knew, change of beneficiary did not, but change of owner had a potential tax/gift impact. Too bad, but since the beneficiary can be changed, that's an odd status of 'gift', it's not quite completed now, is it? JOE

Reply to
joetaxpayer

That's why I'm asking. As long as the beneficiary is changed to someone within the family, there is no federal *income* tax and no forced distribution (or 10% penalty). But according to the following article (dated 11/03), but there are GST consequences:

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There are no tax consequences to changing the designated beneficiary as long as 1) the new beneficiary is a member of the family of the old beneficiary and 2) for GST tax purposes, the new beneficiary is assigned to the same generation as (or a higher generation than) the old beneficiary

It is important to note that under the 2001 tax act, a first cousin is a member of the family of a designated beneficiary. Now, a donor having two grandchildren with different parents may change the beneficiary from one grandchild to the other without adverse tax consequences.4 However, this provision is scheduled to sunset in 2011.

Regardless of family relationship, the change of beneficiary is treated as a gift if the new beneficiary is one or more generations below the old beneficiary, and is also treated as a GST transfer if the beneficiary is two generations or more below the old beneficiary.6 The deemed gift would be to a 529SA for the new beneficiary and thus would qualify for the gift tax annual exclusion. Further, the proposed regulations provide that the five year averaging rule may be applied to this deemed transfer.7

There are endnotes with references to specific parts of the legislation (and proposed? legislation), but I was hoping someone here already had dealt with this and had a clear answer.

It appears that there are absolutely no tax consequences if you transfer from, say, your kid or grandkid to yourself and use the money for continuing education. Or from your grandkid to your other grandkid, or your kid to one of your other (or sibling's) kids. Probably the most likely three scenarios. But the notion that there are potential issues if you transfer from your kid to your grandkid or such is a little disconcerting.

There's obviously been some further tax law passed since

2003, though, and it's possible that this has been clarified better.
Reply to
BreadWithSpam

The link is to an article from 11/03, I agree that the law has probably been clarified a bit. I'll look again over the weekend, I swear we discussed this here and came to an agreed conclusion, hopefully with links to reliable data sources.

The wording of any regs on 529 leave loopholes. I can create a 529 for my child and child's cousin. 12K limit (ignore the five year rule please). Then, soon after, change the beneficiary to my child from the cousin. How is any of that tracked to adhere to the spirit of the law as well as the letter? JOE

Reply to
joetaxpayer

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