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At one time, advice for saving for clooege often suggested that grandparents who were interested in assisting with their grandchildren's college costs open a 529 plan with themselves (or himseolf or herself, if widowed) as the account owner the grandchil as the beneficiary. Doing so avoided reported the 529 anywhere on the FAFSA, because it was not an account owned by the grandchild/student or the student's parents.

As I understand the FAFSA calculations of EFC (Expected Family Contribution) 20% of student's assets are deemed available and 5.65% (more or less) of parents' assets are deemed available for EFC. In terms of minimizing EFC parent assets are better than children's asset, but not as good as grandparents' assets. And available income (as opposed to assets) are expected to be contributed at even higher rates.

"You should be sure to understand the gift-tax consequences of your contributions to the 529 plan. Whether you contribute to accounts owned by you, or to accounts owned by the parents or someone else, your contributions are a gift from you to the account beneficiary (and a generation-skipping transfer if the beneficiary is your grandchild). For large contributions (over $14,000) you may elect on a gift-tax form to treat up to $65,000 of the contribution as made over a five-year period. This election allows you to frontload more contributions into a 529 plan without exceeding the $14,000 annual gift exclusion.

Caution: The IRS has not yet indicated whether a contribution you make to a 529 account owned by someone else will be treated as two gifts, the first from you to the account owner, and the second from the account owner to the beneficiary. Most tax practitioners believe there is only a single gift—from you to the account beneficiary—but the answer remains a bit uncertain."

Has the question raised in the cautionary note been addressed?

I am no expert, but its seems to be an unusual construct to say the the same $14,000 is a gift to both the parents and to the grandchild.

"Simply owning a 529 account for your grandchild will not affect your grandchild’s eligibility for need-based financial aid, but actually using the account could have a negative impact in the subsequent year.

The value of assets owned by a grandparent (or other non-parent) is not reportable on the FAFSA financial aid application. This rule extends to 529 plans owned by grandparents.

However, if a grandparent provides any type of financial support to the student, that support is reportable on the following year’s FAFSA as student income. The financial aid formula counts student income just as it counts student assets (although the assessment percentages and allowances are different). Most financial aid offices interpret the rules as requiring distributions from grandparent-owned 529s to be included as student income, even when the distributions are not reportable for federal income taxes (i.e. they are tax-free)."

A recent post (on this board, IIRC) caused me to double check this issue.

Question 44 on the FAFSA asks:

44. Student’s 2012 Untaxed Income (Enter the combined amounts for you and your spouse.)
. . .
j. Money received, or paid on your behalf (e.g., bills), not reported elsewhere on this form.


AS a result money paid from a 529 plan is considered as student income the following year, and leads to a much larger expected contribution (even though there is no guarantee that future payments will be made [or even that there is still money available to be used for payments]).

With all of that background, and thanks to those who have read this far, if a grandparent owns a 529 plan for a grandchild, can the grandparent tranfer ownership of the account to the grandchild's parents without triggering a second gift tax?

If an immediate transfer the parents (as owner) and to the grandchild (as beneficiary) would trigger only one gift tax, then a subsequent transfer of account ownership would not appear to constitute a taxable gift, but I know enought o know that logic and taxes are only sometimes related.

Any thoughts from the resident tax pros, or any other readers?

Regards, JAFO (and thanks in advance)
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