Hi - First post and I’m hoping you can help me with my 529 plans including next steps and talking me off the ledge. Here is some background:
Kids - 18 & 15. The 18-year-old is doing community college for the 1st year, then hopefully transferring to a 4-year college (but not guaranteed). The 15 year old is a straight A student and likely going to a 4-year college.
Current Savings Accounts:
My 529 Plan - We have 1 account and plan to use for part of our kid’s college expenses. Currently have about 2 years of college expenses saved here and the older is the beneficiary now, but we can switch the beneficiary to the younger penalty free if the older does not use it all.
My mom’s 529 Plans - She has a plan for each child and has about 1 year of expenses in each.
Things were going good until yesterday when my mom received a call from her financial advisor saying that since my son just turned 18, we need to make him the primary on the account. That seemed odd so I called our advisor and said we don’t have to do anything to our 529 plan, but asked if my mom’s was set up as a custodial 529 plan. Sure enough both of her 529’s she has are custodial accounts that are turned turned over to the kids when they become 18.
That is not what we want and feel betrayed by her financial advisor. My concerns are:
I want the flexibility to pay for each of my kid’s college, depending on their need
I do NOT want them to have access to the custodial funds. While I trust them to do the right thing, I want an adult (myself or my mom) to be the decision-makers on what to do with this $, not an 18 year old “adult”.
If 1 kid doesnt need the college $, I want the flexibility to use the other’s 529 for their college expenses penalty free.
The intent of the $ in my mom’s account is for college expenses, not as a gift to the kids if they do not go to college.
Ideally we could convert their custodial accounts to plain old individual 529 plans, but there seems to be a severe penalty for doing so. I feel like her financial advisor is in the wrong and should eat the cost to convert to a 529, but I’m guessing that is highly unlikely.
Does anyone have advice on the best course of action? Is my assumption correct that each kid would own the $ when they are 18 and can only use it penalty free if they use it on their own college? If one doesn’t go to college, or doesnt need the $ can they pay for their sibling’s college expenses penalty free?
The custodian cannot change the beneficiary as they are not the owner. However, the kid takes control of ownership at 18 or 21, and thus I think should be able to change the beneficiary from themselves to someone closely related to them just like an individual 529 (because that’s what the account is at that stage.)
I don’t think you can undo the kids owning the accounts, even if setting them up this way was not the intent. The beneficiary does not need to be the kid/owner, but the kid/owner will need to be the approval authority on changing the beneficiary to a sibling, and this probably can’t be done until after the kid/owner takes control of the account from the custodian after reaching the age of majority.
I have experience with custodian 529 accounts. In my case, the plan allowed a third party to have full control of the account, with the kid/account owner’s approval, after the kid/owner reached the age of majority and took control of the account from the custodian. Fortunately, the kids/owners were reasonable and understood that the money was explicitly gifted for the intent of funding higher education. In fact, they were glad that they didn’t have to learn about 529s and deal with the management of their account, happy to have a responsible adult they trusted continue to do it for them (the custodian became the approved third party and retained/shared full control, with the now legal adult owner). Although a lot obviously depends on the personality and maturity of the kids/owners, it’s possible that the custodial accounts you are concerned about could, with the completion of some basic paperwork and the cooperation of the kids/owners, continue to operate as you had expected they would.
Is it possible that the accounts that your mother opened are not 529s, but UTMA or UGMA accounts?
If she used an advisor to open these accounts, they are more than likely UTMA or UGMA accounts. Most advisors don’t give specific advice on 529s (like how to invest the money) because they can’t get paid from recommending them. It’s not a scam or dishonest- it’s just the way the rules are written.
You can’t move money from an UTMA to a 529 for an 18 year old. You can always roll the UGMA into a regular brokerage once your child turns 18. Then, help him learn how to manage it him/herself. It’s like training wheels for managing money as an adult.
Your mom could also cash out the UGMA before the child turns 18 and use the proceeds to fund a 529, but that’s it. That money would be taxable income for your child in that year. There are specific rules for tax treatment on a move like this, so she should ask a tax professional about how to do this.
UTMA and UGMA money isn’t use restricted like 529 money is.
Your mom should take the lead on this since she opened the accounts. It’s not your money and it never was.
You can always check with a different advisor if you don’t believe me, but a legitimate one would tell you the same thing because it’s all true. The IRS makes these rules.
They are Hartford Smart529 plans, setup as custodial accounts instead of individual accounts. I believe similar to the UTMA/UGMA since it is considered owned by the kids/a gift, but ultimately with the restrictions and benefits of a 529.
I totally understand that this is her money and she is the one talking to her advisor, but the reality is she is a 78-year-old widow who manages her day-to-day financials just fine but looks to me for advice on 401k, investments, and this 529 mess. I am also listed on most of her accounts either as a joint owner or POD, but thankfully have not had to do anything with the accounts other than periodically check to make sure nothing crazy is going on. Unfortunately, I was not involved in setting up this account since my dad was still alive at the time, but they/she went in to setup a 529 plan and seemingly were talked into this custodial product for some reason.
In a perfect world, she would retain ownership of these accounts to help pay for our kid’s college and avoid the risk of a kid using this $ for something not college related (low risk, but I still want to avoid having the conversation especially if one doesnt want to go to college and views this as his/her $ and doesn’t want to help their sibling’s college expenses).
Both of these things depend on the state’s age of majority. A custodian can move UTMA/UGMA funds to a custodial 529 (also called a UTMA/UGMA 529). Once the child reaches the age of majority, decisions to change investment products rest with the child.
A 529 funded this way would still be a custodial/UGMA 529 account. 529s can only be funded with cash, but if the UGMA funds are already in a cash investment, no taxable event would take place when the funds are transferred to a 529.
Yes, and they are good kids and I’m not overly worried they would do something with the money and they don’t know any of this is going on. They just know we have an account for them as does grandma for them, and that there may be student loans needed to bridge the gap.
I’m just annoyed that my parents were talked into a product that doesnt make sense and we seemingly have no recourse other than let the $ go to the kids and hope they are smart with it. My only real worry is if we have 1 that doesnt use the money for college and has car/housing needs and wishes to use the $ for that instead of their sibling’s college expenses. Legally we would have no leverage and I don’t like that.
I have a family member in this situation. Grandparents set up accounts in the kids names for college but the younger isn’t going to go to college. In this situation, the parents feel like the money was intended to be fairly distributed to both kids and that one shouldn’t be penalized if they choose not to go to college. Funds will be used to pay for a trade school and living expenses (maybe a car). The $ was intended to make the kids lives easier, not necessarily the parents.
Oh, that makes more sense. Thanks for elaborating.
I would definitely talk to a personal tax professional in her area that deals with estates. For your question, it should be affordable to get such advice but very costly if you make a mistake, and this seems like a very particular case. I’m assuming the child has not yet assumed control of the account.
So once the custodial 529 account turns into a regular 529 account with the kid as the account owner (and presumably also the account beneficiary) upon the kid reaching 18, what would prevent you from just asking the kid to sign the paperwork to change the account owner to you or your mom?
As long as the plan doesn’t treat the change in ownership as an unqualified distribution (which doesn’t appear to be the case with this particular plan) this should be a viable option. Explain to your kid that the account was titled improperly and he/she needs to sign this form to fix things. Kid would remain as the named beneficiary but that could be changed later to another “Member of the Family” (as defined in the offering plan) at a later date if the need arises. Set up your mom as the new account owner and at the same time set up yourself as the successor account owner.
Obviously the 18 year old wouldn’t have to agree to do this, but it sounds like there are enough other levers to pull to make it clear that it is in the kid’s best interest to agree.
I think “need” is too strong a word here. The account owner, also the beneficiary, should do what’s in their own best interest. This could include, after an explanation is heard, maintaining harmony within the family. OP has stated that a grandparent, now deceased, was involved in setting up the accounts as custodial/UGMA 529s. How confident is OP that this was in fact not the intended arrangement?
You guys are a lot more respectful of your 18 year old kids than we ever were.
Yes, accounts end up mistitled, with the wrong custodian, the tax laws change. We had a few instances where our kids needed to help fix something. At no time did we present the change as “technically you could take the money and buy a car but grandpa intended the money to help you go to college”. All of them knew how to use google and could have discovered on their own the possibilities open to them. All of them also knew that if they wanted/needed help launching into adulthood, aggravating the parents who would be on the hook for any expense not covered by their saved funds or scholarships, was likely a dumb idea.
I don’t think you need to “respect” the autonomy of a kid who is going to benefit from a grandparents generosity. Explain to the kid that he needs to sign the form, and in return, you want to make sure that he has the resources he needs for college, vocational training, a coding academy, or any other educational needs down the road.
