gift tax consequences of Coverdell ESA transfer to 529 plan

I have a Coverdell ESA with my child as a beneficiary. The Coverdell custodian recently announced to me that they're dropping support for the account, so I need to liquidate the account. I'd like to move all the money from this Coverdell account to a 529 plan with the same child as the beneficiary. I'm the owner of both the Coverdell account and the 529 account. Some web pages I've come across (e.g., http://finance.zacks.com/can-move-funds-childs-esa-529-plan-6678.html ) imply that this transfer might have gift tax implications. (The amount to be moved is slightly more than the $14k annual gift tax exclusion.) I don't see why there would be gift tax consequences since the money is moving between accounts with the same owner and the same beneficiary. Am I missing something? Would I have to file a gift tax return for this? Thanks.

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On 8/18/17 8:02 PM, r_q snipped-for-privacy@yahoo.com wrote:

If you are the owner of the ESA, then upon liquidation, the IRS Form 1099-Q will go to you. This is a qualified distribution and will not trigger any income tax if you roll it over. You would endorse the check payable to the 529 Plan. Obtain the rollover form from the 529 plan administrator and submit the form with the check. If the form does not have a section that tells the plan administrator how much of the rollover is contributions and how much is earnings, you need to separately identify that. Otherwise, the 529 plan will treat the contribution as all earnings. These two transactions must take place in the same year.
The contribution to the 529 plan is a gift and is subject to the gift tax rules. If as you state the amount is over the annual limit of $14K, then a gift tax return (Form 709) would have to be filed. No gift tax would be due if you treat the excess over $14K as a reduction to your lifetime gift tax exclusion of $5.49M. See below for another method.
Lastly, if you reside in a state that provides a tax benefit for 529 contributions, you should check to see if the 529 contribution counts. Typically, it does.
Completing the IRS Form 709 (Gift Tax) might require you to pay someone to prepare it as following the instructions can be daunting when it comes to how you exclude the excess over $14K by dipping into your lifetime exclusion. Another method is to elect to treat the contribution as part of five years. In other words, you are allowed to contribute $70K up front and then spread that out ratably over five years. Let us assume that the amount in question is $14,500. Divide that by five you get $2,900 to be treated as a gift in each of the next five years. Completing the form gets easy as there is a check box on page 2, that says you are making the election. You would then enter $2900 as the 2017 gift in Part 1 of Schedule A on page 2. This would flow to Line 1 of Part 4 on page 3. Line 2 would include your annual exclusion of $2900 making the taxable portion zero. Your taxable gifts that flow to page one would be zero. As long as you never exceed the $14K limit for that child in the next 4 years, you would not have to file the Form 709 again. Keep in mind, that you could only gift another $11,100 to that child in any of the five years to avoid filing the 709.
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Thank you very much for the informative reply, Alan! Your idea of spreading the gift over 5 years on Form 709 sounds like a good one. I just had another idea: Does the fact that I'm married help? My wife's name is not on either the Coverdell ESA or the 529 account. But the contributions to the Coverdell ESA came from our joint account funded by both of our earnings, and the beneficiary of both accounts is our child. Could I (we) claim a $28k annual gift tax exclusion rather than $14k? This site ( https://www.efile.com/tax/estate-gift-tax/ ) seems to imply so. Thanks again.
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r_q snipped-for-privacy@yahoo.com wrote:

The short answer is, yes you and your wife can join together and double the gift-tax free gifts.
The longer answer is that exactly how you do that will depend on what state you live in and who earned what money.
If you are in a community property state and the money came from earnings of either spouse, it's considered owned half by each. So a gift of up to $28,000 per donor, per donee, per year, is acceptable without the need to declare it on a gift tax return.
However if you live in a non-community property state, and the money didn't come exactly half from each of your earnings/separate property, then you should file a gift tax return, and elect gift splitting. This is an IRS rule that allows you to treat gifts from spouses as half coming from each, even though it may not in reality. But you have to file a gift tax return and claim gift splitting to qualify.
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On 8/24/17 4:31 AM, Stuart O. Bronstein wrote:

I typically defer to Stuart's expertise in this area. However, I do have one concern. If as the OP stated, that the funds for the ESA contribution came from a joint account but the ESA was titled only in the husband's name, wouldn't one conclude that he had received a tax-free gift from his wife and the ESA funds are his?
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Thanks, Alan. That's an excellent point. Because under some circumstances doing something like that will be considered a gift from one spouse to another. Whether or not it does will depend on state law. But if there is any doubt, filing a gift tax return and electing gift splitting should avoid any issue.
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