I opened a 529 account on my name before our children were born. There is now $11,900 in the account. Since we have not given any gifts to our children this year, I think it would make sense to transfer the 529 to our oldest. I can transfer $11000 tax-free, and the remaining $900 could be applied against the $1000,000 limit for taxable gifts. Correct?
You make a good point, that the tax laws, and individual numbers change beyond most people's ability to keep up. Me, I keep looking it up, depending on the issue.
First, congratulations on your planning even before your children's births, that's great. Consider splitting the 529 into two accounts, so each has some money in their name, and each year you can add as you like to keep both accounts on track.
The annual untaxed gift amount is now $12,000, so whatever you decide, no issue. For 529 accounts, you can gift more, without tapping the lifetime gift exclusion (which is $2,000,000 this year, 2006) up to 5X the annual amount. So one may gift $60,000 to a 529 and it is considered as given $12,000/yr for 5 years. They did this to 'jump start' the 529 deposits. JoeTaxpayer.com
I understanding is that you can change beneficiaries of 529s only within the same generation (ex. siblings, cousins, etc) but that you cannot change beneficiaries of the next generation (a parent to a child, as in your situation). If anyone knows more about this, Please reply so I can see your response but I am pretty sure that that there is this distinction between different generations.
See
B, first the easy answer is that the annual gift exclusion is now $12k so you can do it regardless. And you say "we"...married couples can gift $24k together to any individual. So this one's easy!
But the hard answer is whether you could do this with $25k, or $200k for that matter. Some of the early 529 tax-reporter commentary suggested you could, without the change of beneficiary being considered a gift to the new beneficiary -- as long as you met the rules for relatedness of those beneficiaries.
I'm always suspect of these kinds of things (the IRS has broad powers to dice through tax-avoidance schemes - eg the "step transaction doctrine) but it seemed some people thought it could be done. I just googled to check on the topic and Yahoo has a piece from last week saying that the new pension bill directed the Treasury Dept. (IRS) to close these kinds of loopholes. That's a red flag to anyone considering using 529 plans as an end game around gift tax laws, at least until some regulations issue showing what can & can't be done.
In your case though...under the $12/24k limit so not an issue.
-Tad
This raises further questions. Since the 529 is considered "revocable", what is its status as a completed gift? Also, Etrade web sight has this note, which follows the relations you may transfer to; "However, if the new beneficiary is a member of a younger generation than the previous beneficiary, a federal generation-skipping tax may apply. The tax will apply in the year in which the money is distributed from an account." Lastly, it seems that since the OP was an adult and beneficiary at the same time, he is the owner, not him and his wife. So if the account had over $12K, the 5 year rule would kick in, but not the 12K from the wife, if the money were already in the 529.
Can the government make this stuff any more complex? JOE
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