529 ownership and withdrawals

OK - I seem to have the basics down, but I'm wondering if federal law lets me play with this as much as I want. I open a 529; I am now the Participant. I declare my son the beneficiary.

I put in some of my own money. My mother puts in money for her darling grandson.. I drain the kids Cloverdell account, as 529s seem better now. I take money out of the kids trust fund and put it in the 529. This is a proper fuduciary move, as the taxes will be far less, and the kid will net more money in the long run.

Now - with money from all of these places, the kid finishes college, and I want to give him the left over. I would rather pay income taxes at his rate though, not mine. So, is the proper thing to do is find a new beneficiary, then declare my son the new Participant, then he can drain the account? Or another strange issue here. After getting money from all these sources, I, as the Participant, close the account. I have to pay taxes and penalties on the earnings, but have I just leaglly moved money from my kid's trust into my name? Or - if my mother was wealthy enough that she wanted to gift me more than the $12k limit, can she just put it into the

529 plan that I am the Participant of, and I can then pull it out? This seems wrong, but I don't see a rule covering this loophole. Thanks for your help.

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"Participant"??

The Coverdell account can also be used to secondary school expenses, as well as college, so might be worth keeping if the beneficiary is still in elementary, middle or high school. I take

I'm not sure that taking money from the kid's trust account is such a good fiduciary move, as you would be taking HIS money and putting it in YOUR account. Some might call that embezzlement.

If you distribute the funds to your son (after he has completed college), the disqualified distribution (earnings) will be taxable to HIM at his tax rate. In addition, they would be subject to a 10% penalty if not used for eligible higher education expenses. Alternately, if there is another FAMILY member with eligible expenses, you can rollover the funds to a 529 with him or her as beneficiary (within 60 days of withdrawal).

The taxes and penalties are charged to the named beneficiary, not the custodian.

Money going into a 529 plan is assumed to be for the higher education expenses of the beneficiary. If not used for that purpose, the earnings are taxable to the beneficiary at his or her tax rate AND are subject to a 10% penalty. The contributions are still subject to the annual gift tax exclusion in most cases. What loophole?