529 Beneficiary Change Tax Implication Question

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SuperDave
Posts: 31
Joined: Mon Aug 20, 2012 1:24 pm

529 Beneficiary Change Tax Implication Question

Post by SuperDave »

Hello,

My wife and I do not have any children, but are planning on them soon. Thus, I would like to open a 529.
I did this at Vanguard (my state gets no tax benefit - thanks MA!) and named myself as the beneficiary. I have not funded the account yet.
However, after doing some further reading (posts on this form) it would appear that the better option would be to name my nephew as the beneficiary.

"B) Treatment of designation of new beneficiary
The taxes imposed by chapters 12 and 13 shall apply to a transfer by reason of a change in the designated beneficiary under the program (or a rollover to the account of a new beneficiary) unless the new beneficiary is—
(i) assigned to the same generation as (or a higher generation than) the old beneficiary (determined in accordance with section 2651), and
(ii) a member of the family of the old beneficiary.

(2) Member of family
The term “member of the family” means, with respect to any designated beneficiary—
(A) the spouse of such beneficiary;
(B) an individual who bears a relationship to such beneficiary which is described in subparagraphs (A) through (G) of section 152 (d)(2);
(C) the spouse of any individual described in subparagraph (B); and
(D) any first cousin of such beneficiary.

152 D -2
(2) Relationship
For purposes of paragraph (1)(A), an individual bears a relationship to the taxpayer described in this paragraph if the individual is any of the following with respect to the taxpayer:
(A) A child or a descendant of a child.
(B) A brother, sister, stepbrother, or stepsister.
(C) The father or mother, or an ancestor of either.
(D) A stepfather or stepmother.
(E) A son or daughter of a brother or sister of the taxpayer.
(F) A brother or sister of the father or mother of the taxpayer.
(G) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. "


My questions are - can someone just confirm that (please no answers about other options, I max 401ks and Roths) :

1)As it currently stands if I fund this account and then transfer to my son/daughter that I am subject to gift tax as it is a different generation.

2)If I name my nephew as the beneficiary and then transfer to my son/daughter I am not subject to gift tax (same family and same generation [according to E])

3)If I change the beneficiary designation on the existing account to my nephew, the gift tax is on the value at time of change (0), not the value that year or end of year (if fund the account in 2014 post change that amount is not subject to gift tax)

4)Would it be best to use 5 year option upfront as apposed to each year (14k per year vs 70k in year 1). In theory there is more money in the market for a longer period of time...

5)Anyone know the process for changing a beneficiary at Vanguard/folks that manage 529s for Vanguard?

Thanks!
MN Finance
Posts: 1926
Joined: Sat Dec 22, 2012 9:46 am

Re: 529 Beneficiary Change Tax Implication Question

Post by MN Finance »

I suggest you search some past threads because there have been lots of detailed discussions with knowledgeable posters.

Part of the confusion is that most sources, including the one you cited mention 3 different taxes with modest distinction: gift tax, gst tax, and income tax. Obviously you're concerned with gift tax considerations which is triggered when the beneficiary is changed as a gift from the old beny to the new beny. Also keep in mind that the IRS has left some of these details unclarified.

I would not involve another family member because a) you're now in control of triggering as gift tax issue for someone else, and b) it seems unnecessary. I would open your own, do the 5 year to super fund it, then change (some or all) to your child, again super funding that transfer to your child. Keep in mind you and your spouse can each split gifts to do 14x2x5
Last edited by MN Finance on Mon Sep 15, 2014 7:20 pm, edited 1 time in total.
Calm Man
Posts: 2917
Joined: Wed Sep 19, 2012 9:35 am

Re: 529 Beneficiary Change Tax Implication Question

Post by Calm Man »

It is great that you are enthusiastic and planning ahead. As an older man who has been through life's ups and downs, I suggest that there is a good ways between your needing the 529 and now. I would wait until you know you had the beneficiary of the account that you are intending it for. Good luck.
Ybsybs
Posts: 549
Joined: Thu Aug 28, 2014 4:28 pm

Re: 529 Beneficiary Change Tax Implication Question

Post by Ybsybs »

Yes there's a potential gift tax issue. But if the amount in the plan is:

(1) less than $14,000 when you transfer it - No tax issues at all, provided you aren't also making another gift to the beneficiary in the same year
(2) less than $70,000 when you transfer it - No impact on estate taxes or need to pay gift tax as long as you file a Form 8606 709 with your taxes and claim five years of gifting
(3) less than $140,000 when you transfer it AND you are married - No impact on estate taxes and no need to pay gift taxes as long as you AND your spouse file a Form 8606 709 with your taxes and claim five years of gifting AND both agree to gift-splitting

If it is over $140,000, you do the Form 8606 709 thing and the amount over $140,000 counts towards the $5,340,000 untaxed portion of your estate when you die.

EDIT: I got the form wrong. It should be the gift tax Form 709. Thanks for PMing me to get this corrected.
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The529guy
Posts: 610
Joined: Fri May 23, 2014 1:08 am

Re: 529 Beneficiary Change Tax Implication Question

Post by The529guy »

SuperDave wrote:However, after doing some further reading (posts on this form) it would appear that the better option would be to name my nephew as the beneficiary.
Don't forget that to carry out this plan, you will need to provide Vanguard with the beneficiary's Social Security Number.

I think this would be an awkward conversation:
Uncle: Could you give me Nephew's Social Security Number? I want to make him the beneficiary of a college savings account.

Nephew's parents: Uncle, that's very generous of you - thank you!

Uncle: Oh... it's not actually meant for Nephew. When we have a kid, I'll transfer the account over to him/her.

Nephew's parents: ???

Uncle: So, can I have his Social Security Number? Don't worry, I'll keep it safe.
Kidding aside, Ybsybs's post above points you in the right direction.
SuperDave wrote:Anyone know the process for changing a beneficiary at Vanguard/folks that manage 529s for Vanguard?
Vanguard.com has a "Vanguard 529 Beneficiary Change Kit."
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