[talks about changing the "Account owner" of a 529 plan]
>> 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?
> 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).
So there is potentially two gift taxes, one when the custodian transfers money to the 529 plan and a second when the custodian transfer custodial rights to another person?
The 529 is a peculiar animal. It can be funded by your annual gifting to it's beneficiary. So there is no gift tax. The amount of the gift is no longer part of your esatate. But you are still the owner of the 529. You can change the beneficiary to some other relative with no tax consequence. Apparantly you can also change the ownership with a "maybe" tax consequences. My question is why a "maybe"? If I could understand what would trigger a tax, I might be able to avoid it.
Exception - the gift-ahead amount of a 5-year gift is pulled back into your estate if you die before the 5 years have passed. e.g. if you gift $60K to a 529, and die tomorrow, $48K is still part of your estate.
If the beneficiary is more than a generation off (as a shift to a grandchild), there may be 'generation-skipping' issues, and consequent taxes.
I believe the 'maybe' stems from potential abuses. As you stated in your initial question, the IRS wants to avoid 'abusive' transfers. The use (misuse) of these accounts can potentially move quite a bit of money around. I'm also thinking about the aspect of "poor man's trust" that a 529 can serve. It's money removed from one's estate, has more flexibility than a revocable trust, and needs no trust documents (with all the costs of same). The downside of this use is the investments within the 529 are limited, and carry higher fees, and the 10% non-school withdrawal penalty. This doesn't answer the question. I look forward to a clear answer on the exact details. Remember, there's two potential transfers, change of beneficiary and change of owner. A clear answer on when there are gift tax consequences would be great. JOE
According to the official offering document for the "U. Plan" (which is Massachusetts's Section 529 plan), the owner of a 529 plan cannot be changed (except that a designated successor owner can be named for when the original owner dies). According to the document, if you want to change the owner of the plan, the existing owner would have to close out the plan (and therefore pay income tax and the penalty tax on the earnings), give the money to the desired new owner (and so have to file a gift tax return) and the new owner would open the account with the money.
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