I have considered moving money from a parent owned 529 to a child owned 529 (custodial 529) in the past, but have never done it. I understand as a custodial 529 that it may have FA implications for the child if the child attends a school that uses the CSS Profile where it may be considered a child asset. My current situation is I have one child, a sophomore receiving need based aid at a meets full need college, and another child (my youngest) a sophomore in high school. Although I don’t know what school my youngest will attend, at this point she seems on the right path to go to college. I think, given all this, it makes sense for me to convert some money to a custodial 529.
A couple of questions:
Anyone think this is a stupid idea given my situation?
Would such a move be considered a gift and therefore subject to any gift tax rules? If I currently own the 529 plan could it be considered a joint gift from me and my wife or just a gift for myself? Would I be able to elect the five year rule in such a case to gift more than the annual limit?
@BelknapPoint could you please explain the gift tax thing. @privateID the gift tax is a lifetime amount…and unless you are a millionaire, you aren’t likely to exceed that amount in your lifetime.
Just remember. If the account is in your kid’s name, that kid will have control over that money at a certain point…not you.
There is no ‘annual limit’ for gifts. Give all you want. You’ll need to file a form with the IRS if you gift more than a certain amount in a year (about $15k) just to keep records for when you get to your lifetime limit of ? ($5M? 10m?) No tax for you, the giver, or child, the receiver. Not sure if a transfer of ownership is a gift.
Will it help you to move the younger child’s money? Are you reporting it now on older child’s FAFSA/CSS, and would it mean more FA if you don’t have to report that? If older is already a sophomore, and you’ve filed for her junior year, will it help that much to do it for senior year?
A 529 is always a parent asset on FAFSA. If it is possible that younger child will go to a CSS school that considers the 529 a child’s asset, you may want to not do the transfer. It would really only be worth the risk if the difference to the older child for one year is huge.
Does the oldest’s school require you to disclose assets held by other minor siblings? I thought that some profile schools did to stop people from hiding assets with their children.
If your younger child decides on her 18th birthday to cash out her 529 and blow it on something else, you cannot stop her.
The wisdom of doing this, I think, depends mainly on two things that you may not be able to accurately predict: how your younger child will react to having complete control of a 529 account that she owns when she reaches the age of majority (typically 18, but some states use an older age), and whether or not that child ends up at a school that assesses a student-owned 529 as a student asset when calculating institutional need-based aid. The amount of funds in the student-owned 529 will of course play a large part in informing your decision.
Yes.
I’m not sure; the answer probably hinges on the process for taking the funds in a 529 account that you own and turning that money into a 529 account that your child owns. You need to talk to the plan administrator. Will they simply let you change the owner from you to your child? Or will you need to liquidate the account that you own (and possibly face tax consequences) before gifting the funds to your child by placing them in a new 529 account that the child owns?
You can always gift as much as you want; what you are asking about is using the five year rule to stay within the annual gift exclusion amount. You would still have to complete IRS form 709 to document your use of the five year rule. If there’s no chance that you will exceed your lifetime exemption (currently $11+ million for gifts that exceed the annual exclusion amount plus your estate value at time of death), it probably doesn’t make any difference how you do it.
This is for parent assets that are held in the name of a child for tax purposes; based on OP’s description, that is not what is being contemplated here.
Thanks for the responses. It’s awesome how I can post a question, go to the gym and come back to excellent responses.
I have not done the CSS Profile for my college age child’s junior year yet. So it will be for two years. As far as I can tell, it will save me the 5% or so for two years on the amount I transfer.
Yes, I understand that there will be no gift tax, just the potential to file a form. The form, I believe, is not complicated but you need to keep filing every year I believe. I am not sure how much i want to transfer, so at this point just looking to know the rules.
As far as the child having access to the money at 18, I think that is situation dependent. First, I think my child would never do that. Second, I have no intention of even explaining those kind of rules to her. I am very honest with my children and would answer any question, but have always just talked about these accounts as being for college and see no reason to mention it.
As to whether she will go to a Profile school, it’s hard to tell. Good student, but I’k guessing a SUNY Binghamton or something on that level out of state.
Didn’t realize for the five year rule election that you have to complete IRS form 709 to document. Again, not a big deal and just trying to understand the rules. I wonder if you would only need to file it once.
I plan to call the plan administrator soon. Just love to hear other opinions before I do.
There is not a question on the Profile about assets that belong only to siblings.
@BelknapPoint what happens if the assets are put in a 529 owned by the child? At age 18, the student would have access to these funds, I believe. But…would the parents still have access or would ownership be solely that of the student with the parent having no real control at all.
I ask, because this parent says he or she is not going to tell the student about the access the student would gain at age 18.
The age at which the account owning student would have the legal right to control the account would depend on the UTMA/UGMA statutes adopted by the controlling state. In practical terms, how and when it happens would come down to the administrative policies and procedures of the 529 plan and how the parent/custodian chooses to proceed.
@BelknapPoint Thinking about this a little more, I am starting to think it would not be considered a gift. The money is currently in a parent owned 529 for child X, which means it was already considered a completed gift. Converting the account from a parent owned 529 to a child owned 529 doesn’t seem to be a new gift. It has already been gifted to child X.
While I agree that a contribution to a 529 account is considered a completed gift, this is a unique way to interpret that term under tax law and IRS regulations. Normally, a completed gift cannot be undone or changed, but with a 529 account the account owner can do either – the named beneficiary can be changed with certain limitations (the account owner can even name himself as the new beneficiary), and the account can generally be liquidated at any time with the account assets going to the account owner (with the obvious tax and penalty ramifications). Making the child beneficiary the new account owner turns what were “completed gifts” only under the special 529 rules into assets that can only be used for the new account owner’s benefit while the owner/beneficiary is a minor, and after that any use for other than the owner’s benefit is at the sole discretion of the owner. In other words, the ownership transfer more resembles a completed gift than what originally took place prior to the ownership transfer.
But, as far as I am aware, there is no statute or IRS rule/regulation that covers this issue, so as of now it’s all just an educated guess as to how the IRS would look at this. The first thing I would want to determine is whether or not the 529 administrator even allows changes in ownership without liquidating the account – not all plans allow this, and if yours doesn’t, this particular gift question does not apply.
The earlier contributions you made to the 529 were already considered to be a completed gift, with the current annual maximum of $15,000 per giver (if not want to file a Form 709). That’s why annual limits are placed on 529 contributions (or you have the ability to fully front-load 5 years of the annual gift-exclusion amount all at one time, but then can’t make additional contributions until 5 years later). So, yes, no tax paperwork is due just for transferring to the child/student who was previously the intended beneficiary of those funds.
As for financial-aid considerations, both child-owned and parent-owned 529s are counted in exactly the same way now. It used to be that a child/student-owned 529 was assessed at 20%/year toward expected family contributions for college expenses. No More. Today, 529s are assessed at 5.64%/year, whether owned by parent or child/student – just like other parent-owned assets.
But you, as parent, will lose control of how the funds are dispersed/spent if you make the transfer. Your child will then be “in the driver’s seat.”
Absent a rule that’s particular to a certain 529 plan, there are no “annual limits” on 529 contributions. There are overall account limits that are determined by each plan administrator up to “the amount necessary to provide for the qualified education expenses of the beneficiary.” (See IRS pub 970) It’s certainly possible for any one person to contribute more than the current annual gift exclusion to a 529 account in any one year, or for that matter more than the five year front load total.
A parent who is also the custodian of a child-owned 529 account can retain a certain amount of control al least until the child attains the age of majority under the applicable state’s UTMA/UGMA laws and after that point the child either takes action to assume full control, or control is relinquished by the custodian.
The plan is NY. I had inquired in the past and they do allow it. I plan to call tomorrow to make sure they still allow it and find out any other information they can provide me.
My kids would have had no idea if they had control over the accounts (if they’d had one) unless I told them. One started school at 17 so would have done her first year under my control anyway. It’s a risk you take with transferring control, but (at least in my case) I don’t think it would have been a big risk and might have been a benefit.
If the child is going to be the owner and her financial aid award might be affected by her ownership, I think she should not be kept in the dark by the parent.
The financial aid would be affected by student ownership or parent ownership. The older student might get more money if a younger sibling’s account is transferred to that younger sibling’s ownership and no longer reported on older siblings FAFSA.
A 17 year old turning 18 wouldn’t know that the account was even there until a parent told them, and would a parent who suspected the kid was going to withdraw all the money and not go to college tell that kid that the college account was now his, to use as he wants? I wouldn’t, I’d just keep calling it ‘the college account.’. If the kid took off to become a ski bum, the statements would keep going to the parent’s address, and the money would just keep growing. Not lying to the kid, just not bringing up that the money is there for them to use for a new snowboard or really cool VW bus.
Spoke to the NY 529 people. They say it is a doable, although I got the impression it is not common. In addition, the current rules are for the entire account to be moved. They said if I write a letter and explain why I would want a partial amount, they may (probably) would allow that. This will involve filling out a couple of forms, copy of birth certificate and a letter of instruction. So this won’t be trivial to do, but not too bad.