529 Plan Transfer of Ownership

"From Commonwealth of Virginia 529 College Savings Plan Program Description Can I transfer ownership of the account?
Yes. Ownership of the account can be transferred by changing the account owner. Written authorization is required from the current account owner. To request an Account Owner Change Form, please call our toll free number, 1-888-567-0540, or download the form from our web site,
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There may be tax consequences related to the transfer of a VEST account, so please contact a tax professional to determine the effect of an account transfer on your individual situation." My understanding is there are no tax consequences unless it is an "abusive" transfer. Can anyone suggest the circumstances under which there would be tax consequences?
Reply to
jay1000
jay1000 writes:
[talks about changing the "Account owner" of a 529 plan]
Well, if the account is worth more than $12,000, I believe there will be gift tax consequences (a gift tax return would have to be filed even if (as would be likely) no gift tax due). -- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us
Reply to
Rich Carreiro
Agreed, but wouldn't this transfer be subject to the same 5 year rule (that you can gift up to 5 years' worth or $60K and while you must file a gift tax form, there is no tax due)? JOE
Reply to
joetaxpayer
There's no five year rule. There is a lifetime exclusion. You can give up to a total of $1,000,000 that is supposed to appear on gift tax returns before any tax is due. Stu
Reply to
Stuart Bronstein
A deposit to the 529 has a 5 year look ahead, so one can put in $60 and not tap the $1M lifetime gifting credit. If you are suggesting this is ignored for transfer of beneficiary, that may be. But 529s have a five year rule. There seem to be a number of specific details that are either unadressed or not well publicized, I think this is one of them. JOE
Reply to
joetaxpayer
There is a five year rule with regard to contributions to a 529 plan. You can lump five years of contributions into a single year and not trigger the gift tax as long as you do not make any additional gifts to that individual for the five year period. Ira Smilovitz
Reply to
Ira Smilovitz
Thanks. I hadn't read the title of the thread and thought you were talking about gifts in general. Stu
Reply to
Stuart Bronstein
I may be confused but the donee of a 529 (QTP) plan is the beneficiary. When one makes a contribution to a QTP the rules relating to gift taxes are based on the donor making a completed gift to the donee (beneficiary). I don't see how there would be gift tax implications just because the owner (trustee) is changed. Now, if the new owner changes the beneficiary there could be gift tax implications. Here is the paragraph in Sec. 529: (B) Treatment of designation of new beneficiary.-- The taxes imposed by chapters 12 and 13 shall apply to a transfer by reason of a change in the designated beneficiary under the program (or a rollover to the account of a new beneficiary) unless the new beneficiary is-- (i) assigned to the same generation as (or a higher generation than) the old beneficiary (determined in accordance with section 2651), and (ii) a member of the family of the old beneficiary.
In other words, the new beneficiary would have to be a member of the same family and either of the same generation or younger or gift taxes would come into play.
Reply to
A.G. Kalman
The 5 year rule is another interesting feature of 529's. Assuming that this feature has NOT been used, are there any tax consequences to a transfer of ownership of a plain vanilla 529?
Reply to
jay1000
"A.G. Kalman" writes:
The owner (trustee) can take money out of the 529 at any time for any reason (though he'll pay income tax and a 10% penalty tax on earnings if the distribution isn't used for the beneficiary's qualified education expenses).
If the owner can name a different owner of the 529 plan, and if that transfer was not subject to gift tax, that would create a massive loophole in the gift/estate tax structure.
I know Congress can be brain-dead, but I doubt they were that brain-dead. Therefore I'm willing to bet that: (a) ownership of a 529 plan can't be changed, or (b) if it can be, gift tax rules do apply.
-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us
Reply to
Rich Carreiro
I don't know what massive loophole you refer to. Any contribution to a 529 plan is a completed gift. Until such time that one changes the designated beneficiary there can't be any "gift tax" consequences as no gift is made when the owner or participant (as some plans call the account owner) is changed. A change in the account owner has no immediate impact to the designated beneficiary. Distributions may have "income tax" consequences to the distributee. The Pension Protection Act of 2006 added Sec. 529(f) that gives the Treasury Sec'y authority to "prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and to prevent abuse of such purposes, including regulations under chapters 11, 12, and 13 of this title." No regulations have been issued. I have no doubt that if abuse of the 529 rules relating to gift and/or estate taxes occurs, the regulations would be forthcoming.
Reply to
A.G. Kalman
From pub970;
Changing the Designated Beneficiary
There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family (defined above). [a list of 9 relationships follows the cite above] Rich I agree with your logic 100%, to me even such flexibility on beneficiaries is opening a door for abuse. Do you (or anyone here) have any IRS reference that the owner change is what triggers the gift tax consideration? And if gift tax applies, does the 5X rule allow a shift of $60K/owner with no tax? Just from a logistics standpoint, if I transfer an account to a cousin as beneficiary, I'd rather not be saddled with the 'ownership' as well, would it be natural to want to change the owner to the new beneficiary's parent? Whatever the case, I'd love to see a definitive explanation of this. JOE
Reply to
joetaxpayer
"A.G. Kalman" writes:
The massive loophole would be (if changing owners were allowed) this: 1) I put $N into a 529, with myself as owner/participant and whoever as beneficiary. 2) Now I change the the owner/participant to someone else. 3) That person takes all the money out as a non-qual distribution.
If there's no gift tax at step (2), I've just managed to transfer $N to the other person free of gift tax consequences. As for objecting to step (3), at least for MA's 529 plan (and I suspect all others), the owner/participant is free to take the money out for any reason, though they'll of course have to pay income tax and the 10% penalty on any earnings.
At least for MA's 529 plan, the owner/participant *cannot* be changed. To "change" the participant, the original participant must close out the account, paying income tax and the penalty on the earnings, give the money to the desired new participant (and that's where the gift tax will come into play) and the new participant will have to open a new 529 account and contribute back the money.
To be specific, distributions made to the beneficiary or his school are taxed to the beneficiary (to the extent they are non-qualified) and distributions made to anyone else are taxed to the owner/participant. -- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us
Reply to
Rich Carreiro
May be my problem is with "massive." If I want to transfer X$ to someone else and avoid gift tax, why not just gift the $12000 to that someone else rather than putting it into a 529 and then changing owners? If I put more than $12000 into the 529, I pay gift tax. Now... someone is going to bring up the five year rule of gifting $60000 into the 529 plan all at once. I would think that if the owner changes within the five year period there would be a prorated amount subject to tax (just as if the donor had died before 5 years elapsed). If not, then this is an example of abuse that the Sec'y can fix via the regulation authority granted by Congress in the Pension protection Act.
Reply to
A.G. Kalman

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