First, a disclaimer: I am providing my opinions based on my imperfect understanding of the rules and regs. You should not rely on my opinion, but instead seek professional legal or financial advice if you are not sure of what you are doing.
If the aunt owns the 529 account and names the niece as beneficiary, the aunt can make up to a $70,000 one-time contribution and treat it as if it was made over five years for gift tax purposes. This will work if there are no other gifts to the niece over the same five years, and the full $70,000 will be covered by the annual exclusions. I believe that a gift tax return will still have to filed, however, to document what has taken place.
The benefit of this is that tax-free growth can start immediately on a large amount of money, hopefully yielding a greater benefit for the niece (of course, the investment choice will be a critical factor here). Also, the aunt will retain full control of the money, and will be able to change the beneficiary if she wants to, within certain limits, and decide when distributions from the account are made. This may be a good thing or a bad thing, depending on who you are. The aunt could take the money and use it for herself; even on non-education related things, if she is willing to pay tax and an additional 10% penalty on any earnings.
The biggest drawback is that funds from the 529 account to pay for niece’s QEE will have to be reported on the next year’s FAFSA as untaxed income for the niece, which will probably increase her EFC (may not be a factor, depending on other financial considerations). Somewhat mitigating, however, is the fact that the unspent account balance is not included as a FAFSA asset for either the student or parents. Tax-free earnings are nice, but to get that the money has to be used for a fairly narrow purpose, with the above-mentioned penalty assessed if the money is spent on non-QEE.
In the end, I think it really comes down to a matter of control. Does the aunt want more or require less control over the money she is generously providing?
So really, the only way to have the aunt give this money for college costs…and have it NOT be on the FAFSA or taxes…is to give it in $14,000 a year or less gifts to the parents…who then would immediately use it to pay the college bills.
No question…any money paid on behalf of the daughter to the school will need to be put on next year’s FAFSA as “money paid on your behalf”. There is a line for this.
And it will likely reduce her need based aid, if she has any.
If there are two parents in the picture, the aunt could give a total of $28,000/year ($14,000 to each parent) before running into the gift tax reporting requirement.
One wrinkle on the $14,000 annual gift. That’s the limit for a gift to each person. above which the gift must be reported and may have gift tax implications for the giver (not the recipient). But since it’s for each person, the giver could give 14 grand to one parent, and another 14 grand to the other parent (if there are two of them, of course). Indeed, if the giver is married, she and her spouse can each give 14 grand to each of the parents (although that does need to be noted on the givers’ tax return, as I understand it), without gift tax implications. None of this has tax implications for the recipient, and it isn’t considered income by the IRS. (I have no opinion on the FAFSA implications of this.)
Absolutely, and no gift tax implications, no matter how much is paid (up to the QEE limit, I believe). As thumper points out, however, this must be reported on the next year’s FAFSA as student untaxed income.
Sorry to revive a thread from earlier this year. Just wanted to point out that although a gift to a a parent may not be considered as parent income on the FAFSA, I believe it is considered as parent income on the CSS Profile (CSS question PI-230A: Enter the amount of cash your parents received and any money paid on their behalf (e.g., bills)
in 2015).
