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Subject:  Re: 529 Plans and Gift Taxes Date:  9/13/2013  5:45 PM
Author:  JAFO31 Number:  119141 of 123151


ira {{{"The "double gift" question rests on whether a contribution to a 529 plan owned by someone other than the donor constitutes a two-step transfer (to the owner and then to the plan) or is a direct transfer to the plan. I think it would be a stretch for the IRS to insist on the two-step interpretation."}}}

J: <<<This is what I also expected, but then why does a time separation generate a second tax when a simultaneous transaction would not? Is that not elevating form over substance?>>>

"I'm not sure I understand your question. Time separation (if you mean parent funding grandparent 529 then acquiring ownership of the plan) generates a second tax because of the change of ownership of the plan. The case where a parent funds a 529 owned by the grandparent shouldn't generate a second tax as that would be elevating form over substance, in my opinion."

Let me try again. To simply references, GP refers to Grandparent, PS refers to parents (and a P refers to one of the two parents) and ST refers to the granchild/future college student.

Using 2013 annual exclusion of 14k, let us say that G funds 70k into a 529 plan for ST and with GP as the account owner.

As I understand the rules, that is a gift to the ST, but no gift tax is due (and no lifetime credit) is used if the GP files the proper tax paperwok regarding accelerating annual gifts.

Suppose alternatively, that G funds 70k into a 529 plan for ST and names the PS as the account owner (i.e., not an exsitng account previoulsy established by the PS).

As I understand the rules, that is still a gift to the ST, but no gift tax is due (and no lifetime credit) is used if the GP files the proper tax paperwok regarding accelerating annual gifts.

The double tax concern is whether that is a gift to both the PS and the ST (or only to the ST).

As I understand it, most commentators believe that it is still a gift to the ST, and the GP is not making a 70k gift to the PS, who are in turn making a 70K gift to the ST.

If that understanding is correct, then the time separation question is if a single gift is made when the GP funds a 529 plan naming the ST as beneficiary and the PS as the owner, why does breaking that into two parts, separae in time, funding occuring at one time and later subsequent naming/transferring ownership to PS consitute to separate taxable events? If that is still unclear, then ask again.

J: <<<Ok. Then if the goal is transfer from the grandparent to the parents before it is used, to avoid reporting it as grandchild's income (and to avoid using any lifetime credit), then I guess the usual rules of gifting apply --- transfer of the annual exclusion amount split over two years (given that is is now September) and to each of the parents of the grandchild . . . 14k in 2011 to one parent (to minimize amount reported on FAFSA filed in January or February 2014) and then 28k to both parents in 2014 after the FAFSA is filed would transfer 42k in within the next 4-5 months. Possible slightly more gifted in 2013 to the second parent if the total amount to be gifted in greater than 42k but less than 56k, or alternatively, simply transfer the amount in excess of 42k in 2015 after FAFSA filing (presuming it is less than 28k, less than 60k total in 16-17 months).>>>

"I'm not sure what the objective is here. It's been a while since I've dealt with FAFSA calculations, but my understanding is that any 529 disbursement on behalf of a student is considered student income in the next year's FAFSA calculations regardless of who owned the FAFSA."

The objective is to minimize EFC. Tax evasion is problematic but tax avoidance is perfectly permissible. The United States Supreme Court has stated that "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted."

Specifically Judge Learned Hand wrote - "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes." Helvering v. Gregory, 69 F.2d 809, 810-11 (2d