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Subject:  Re: 529 Plans and Gift Taxes Date:  9/19/2013  7:26 PM
Author:  JAFO31 Number:  119169 of 127637

I believe I have my answer:

"Section 529 plans also provide favorable federal estate and gift tax provisions, making them a valuable estate planning tool. There is an accelerated gift option that allows you to average gifts over $13,000 per beneficiary ($26,000 for married couples) over a five year period without incurring federal gift tax. So an individual can contribute up to $65,000 per beneficiary in one year and a couple up to $130,000 per beneficiary without incurring gift tax. [[[NOTE - this was written before recent increase to 14k per year annual exclusion ammount]]] If you give the full amount, you will not be able to give any gifts to the same individual during the five year period without incurring gift tax or using up a part of your lifetime exclusion.

Contributions below the annual gift tax threshold are immediately removed from the donor's gross taxable estate (and included in the estate of the beneficiary). Unlike certain types of trust funds, contributions to section 529 plans are considered a completed gift of a present interest and so are excluded from the donor's gross estate. Contributions above the threshold are included in the donor's gross estate only if the account owner cancels the account or the donor dies during the five year averaging period. If the donor dies during the five year period, the contributions are counted in his or her estate pro-rata according to the number of remaining years, not including the year in which the donor died.

"The following summarizes the impact of section 529 plans on financial aid eligibility:

Section 529 college savings plans are treated as an asset of the account owner, and so have a low impact on financial aid eligibility. College savings plans are reported on the Free Application for Federal Student Aid (FAFSA) as an asset of the account owner, which is typically the parent. Distributions from a college savings plan have no impact on financial aid eligibility (i.e., they are not counted as untaxed income or a resource). [[[NOTE - No longer rue; see below]]]

Section 529 prepaid tuition plans are now treated as an asset and are reported on the FAFSA, just like section 529 college savings plans. The asset value is the refund value of the plan. Distributions have no impact on financial aid eligibility. This change went into effect July 1, 2006. (Previously they were treated as a resource, which reduced need-based financial aid 100%.)

"Previously, if a section 529 college savings plan was owned by someone other than the parent or child (e.g., a grandparent), the plan could be omitted entirely from the financial aid need analysis, affecting neither income nor assets. This loophole, however, was eliminated by the College Cost Reduction and Access Act of 2007 effective with the 2009-10 award year. Such 529 plans are still not reported as an asset on the FAFSA, but any distribution from the 529 plan is reported as untaxed income to the beneficiary, resulting in a severe reduction in eligibility for need-based aid. (This applies only to the FAFSA. The CSS Profile asks the family to list all 529 college savings plans that name the student as a beneficiary, so plans owned by a grandparent but with the student named as a beneficiary would have to be reported.)"

So back to my tax questions (though I doubt any of the foregoign changes the response).

If "contributions to section 529 plans are considered a completed gift of a present interest and so are excluded from the donor's gross estate" even if account is owned by the donor, is the later transfer of wonership also a taxable event?

If yes, as to the entire account value or only the increase in value above the amount originally gifted?

If the entire account value, then the same 14k is being counted twice for gift tax purposes.

Regards, JAFO
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