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"Transfer of assets to a beneficiary do not constitute a taxable gift because the tax code (Section 529) excludes the transfered amount from gift tax provided certain conditions are met."

Then why is there a provision allowing for a larger contribution in a single year (5x the annual exclusion amount) provided that the grandparent files appropriate paperwork allowing accelerated gifting of annual exclusion amount?

Perhaps my choice of words was confusing. Contribution to the 529 is not the same as transfer (distribution) to the beneficiary. The first is subject to gift tax considerations. The second is not, if the rules are followed.

"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."

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.

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 obvious way to game the system is to hold of on using the 529 funds until after the last FAFSA is submitted.

If I've misunderstood something, let me know.

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