I know this may seem premature but I see such great advice here I am hoping no one minds my asking this question.
I am considering opening 529 accounts for my nieces and nephews (ages 8, 10, 12). The accounts would be in my name and then each child would be a beneficiary (1 account per child, 3 accounts total). I had considered putting in my name as the beneficiary and transferring to the children when they were older, but my understanding is the gift tax would come into play then (assuming the account is over 14K, or whatever the yearly amount is in the future). So the accounts would definitely be in the kids name with the parents aware.
My question is regarding the withdrawals. Let’s say my niece pulls out money and buys a car, instead of paying for school. As the beneficiary is she the one paying the tax penalties, or am I the account holder the one stuck footing the bill for that? I can’t imagine being given access to pay the school directly from the 529, and also don’t see my BIL giving me paperwork proving the funds were spent on the appropriate expenditures.
While I am certainly trying to do a good deed by funding some of their education, I don’t want to inadvertently end up with an unexpected tax bill related to it. I am also not willing to put any money in the 529s my BIL has opened, as he jokes too often about raiding them for his own benefit.
I understand your question and would like to see the answers by better experts than me.
I think the way to handle the withdrawals on this is for you to tell the beneficiary that once they are accepted to schools, and bills are due, that you will be sending a payment directly to the schools from a 529 plan set up with them as beneficiary. You usually don’t need full access to their school accounts to make a payment for them - just a student ID number and some confirmation from them as to what their net bill of QEEs will be (tuition and fees, excluding room/board, etc.). I would expect that your nieces/nephews will be able to provide that information to you in exchange for your benevolence.
Depending on whether or not they attend a CSS Profile School, they might need to disclose these accounts as there is a question about if anyone else will be providing assistance. There may be legit strategies you can consider to help maximize any need based financial aid that they may qualify for - things like not making disbursements from your 529 plan to them until the 2nd semester of their junior year - but again, depending on the amounts involved this has to be balanced with the gift limits. Have you considered letting them take loans, and paying them off for them after graduation?
Are you thinking you will be in a position to pay the full cost for them? Or just be able to help in a partial, but significant way?
Kudos to you for looking out for the best interests of your sibling’s kids.
Penny, there is zero gift tax due (as in zero, no dollars) in a year where you give someone more than the annual federal limit (currently 14K). There is a simple form which you-- the donor- would file, which will take you five minutes to fill out and mail, and you do not need a CPA to prepare for you. There is NEVER a tax liability for the recipient, and there would only be a financial consequence to you if you die with a massive estate, and if and when that happens (let’s hope you die with millions for your heirs to worry about) your executor would deal with the filings at that point.
You as the holder of the account can retain as much control of disbursements as you see fit. And you can require whatever documentation you want - because it’s your money, even though niece or nephew is the beneficiary. follow puppies’ advice and just pay the school directly when you can, and for things like books - get the receipts are no payout. You are in charge
If the niece/nephew would be full-pay none of what i’m about to say matters, it would definitely matter if they are low-income, so read or ignore as appropriate. A 529 as you’ve describes doesn’t show up as the niece/nephew’s assets (or the parents). Along the lines of profile schools asking for other sources of income, some Profile schools do specifically ask about 529 funds held by relatives (like grandparents), but they are few and far between (of the many schools we filled out Profile for, only 1 asked about this). The more likely financial impact to FA would be that any funds (from you or grandparent) is treated as income to the niece/nephew so it would decrease their aid (if a high enough amount).
another consideration. you don’t have to open 3 accounts, you could just open a single account now, and then later as the younger sibs start going to college, move funds into new accounts. the rules for who a beneficiary’s funds can be ‘given’ to are pretty much for any family member, up or down the tree. Just look at the rules for the specific 529 fund in question to be sure.
Good advice here. We have 529 for young relatives too. If one does not go to college you can assign it to a different person.
One tried to rent an apartment saying that she had all this money available. The leasing agent phoned and I said, “No, this is my money that I choose to disperse when she is a full time college student. She is not currently enrolled in college. If I die tomorrow she does not inherit the money. This is not her money.”
edited to add: We have several accounts that we funded with equal amounts at the same time. The kids have been going to college in fits and starts (or not at all) and it makes it easier to know who has how much left available to them.
I doubt that I can pay full cost, considering my BIL is pushing a school that right now is over 75K a year and I have a feeling the kids will have more average stats than spectacular (but they are young still, so I could be totally wrong). The parents are also pretty open about having credit issues so I doubt they’ll be taking on loans for the kids, unless the parent plus loans don’t care about that. Pretty sure private loans are a no go.
I could probably manage to cover instate tuition if they lived at home, especially if they had the grades at the time for our state scholarship, assuming it still exists. Definitely wouldn’t be able to cover the dream school that the kids recently were taken to on a vacation.
I was considering multiple accounts and contributing up to the state tax benefit per beneficiary, so about 12K total spread across the three accounts. If I could afford to do that every year I would, but I can’t predict the future. I can also see my BIL/SIL refusing to give the paperwork needed to prove the expenditures or access to pay bills directly, and then griping to everyone they can that I’m keeping kids from going to college. I may be talking myself out of doing this and just writing a check to pay off a student loan or two in the future for the kids.
While I understand the benefits of a 529 (state tax break and tax free growth), are these benefits worth the hassles in your case? There seems to be a lot of trust issues going on. My thoughts would be proceed with the plan and keep your mouth shut about it. In ten years, you can reevaluate the situation and decide at that time to let your BIL know about the plans. That way you do not remove your BIL’s incentive to save. Also it give you the option to use the money if you need it. If you change you mind you can cash out the plans and pay the penalties. Since no one knows about the plans there will be no broken promises or hurt feelings. Option two is just set the money aside and then in ten years offer to help if you want. Again, no need to tell anybody until you make the decision. As I understand it (talk to a tax expert), you can pay any amount of money directly to a school without any gift tax issues.
Make sure you can deal with the reality of this plan. While your money might directly pay for tuition, the BIL money that was earmarked for tuition is now freed up for any other expense even one that you don’t like.
Invest the money for yourself and then at the time you can gift it as you like. I imagine you can finagle your own tax avoidance optimisation without a 529 and still gift them money to avoid their tax liability. If you have 12K a year to invest over the next 6/8/10 years you should probably do it with you in mind. As it is 12K a year I am assuming you are more generous than wealthy? Do you have your retirement and long term care paid for? Fully optimised IRA/401K/investments etc?
Definitely not wealthy, just in a position (at least for now) to try and help the younger generation (and 401K, etc are maxed out). I had a full tuition scholarship and lived at home through college, and am very thankful that I do not have the loans that my friends and coworkers do. And selfishly liked the idea of the tax break now for me and the tax savings in the future as well. Am thinking it probably isn’t worth the headache and potential future drama unfortunately.
Well, someone showed me the cost of a care home for 2 parents was 84K a year for them both. I don’t know if you have children but for any of us that should be a fairly terrifying outcome. Even with children I don’t want them on the hook for me and dad living in the basement. We are living longer but not necessarily healthier. If the average student loan really is $30K not 240K then we should all look at how that happens. CC is full of outliers. And maybe some liars LOL.
it is very easy to open the 529 accounts with you as the owner. All you need is their names and SSNs. When they get to college age, you can still control the payments by making them to the college(s) directly. Their parents will have to know the amounts when they fill out FA documents in years you make the payments, but there is no need to fear they will be used to buy cars and vacations as you’ll still be controlling the accounts. If one niece or nephew doesn’t go to college, you can name a new beneficiary. There might be some arguing that they don’t want to go to college but want a big wedding or car or trip around the world, but if it is in a 529, it is intended for college and you still control it.
I would set up the accounts and never say a word about them until the time comes for college.
Check whether or not this would be considered "assets" for purposes of financial aid. I know that an Aunt's assets in general will not be considered, but I am not sure about a 529 with the student as beneficiary.
There is a risk of having too much in a 529 plan. You could still use it for other relatives, but there are penalties if it is not used for university. This might for example come into play if a student gets a very good merit scholarship, or goes to an inexpensive state school (I know that not all state schools are inexpensive any more, but some still are).
