Illegal or Immoral 529 Plan?

[slow n steady]

I'm pretty sure when you invest in a 529, the amount in the plan counts as the parents asset's when applying for financial aid. A 529 plan that is funded by the grandparents doesn't count as an asset at all when applying for financial aid.

Question: Is it illegal or immoral for my parents to fund my children's 529 plans if I just happen to gift my parents the same amount of money that they put in the plan?

[bmelikia]

Not illegal or immoral in my book. . .if what you're saying would work then I'd say it sounds very smart to me. . .

[sscritic]

I'm pretty sure when you invest in a 529, the amount in the plan counts as the parents asset's when applying for financial aid. A 529 plan that is funded by the grandparents doesn't count as an asset at all when applying for financial aid.

Question: Is it illegal or immoral for my parents to fund my children's 529 plans if I just happen to gift my parents the same amount of money that they put in the plan?

It's not a gift if there is a quid pro quo.

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

http://www.irs.gov/businesses/small/art ... ,00.html#2

I think the fact that you have to ask the question means you know the answer, but you don't like the answer you know.

[sscritic]

Another point. The rules on what counts as what and what percentage applies change almost every other year. The fafsa rules are not the same as the CSS Profile rules. If your children aren't 18, you really don't know the rules that will apply when they are ready for college.

The need-based financial aid treatment of family assets depends on whether they are owned by the student or the parent. During need analysis, the federal financial aid formula assesses a percentage of student assets and a percentage of parents assets. Student assets are assessed at a flat rate of 20% (effective July 1, 2007).
...
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).
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%.)
Starting in 2009-10, the custodial versions of qualified tuition accounts (section 529 college savings plans, prepaid tuition plans, and Coverdell education savings accounts) are treated as parent assets if the child is a dependent student and as a student asset if the child is an independent student.

This more favorable treatment of custodial qualified tuition accounts was enacted by the College Cost Reduction and Access Act of 2007 with an effective date of July 1, 2009. This legislation corrected a legislative drafting error in the Higher Education Reconciliation Act of 2005 which temporarily caused custodial qualified tuition accounts to be disregarded as assets on the Free Application for Federal Student Aid (FAFSA) in 2006-07, 2007-08 and 2008-09.
...
Note also that if a section 529 college savings plan is owned by someone other than the parent or child (e.g., a grandparent), it seems that the plan may be omitted entirely from the financial aid need analysis. There appears to be an intentional loophole regarding the treatment of such 529 plans. (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.)

http://www.finaid.org/savings/529plans. ... cial%20Aid

That's four major changes in the last five years.

[hsv_climber]

There are so many negatives with that approach:

- State tax deduction (if available)
- Issue with withdrawals if child would get a scholarship
- Tax write-offs if closing 529 with loses
- Estate handling if grandparents would die
- Medical payments for grandparents if they would start running out of money
- and so on.

[happymob]

Just be aware that you will lose control of the money. Your parents could refuse to disburse it or withdraw it (with the penalty) and use the money for anything they wanted. Having your kid's name on the account doesn't help as your parents can change that at will (and control the disbursement of the money, anyway).

[moolman]

Just be aware that you will lose control of the money. Your parents could refuse to disburse it or withdraw it (with the penalty) and use the money for anything they wanted. Having your kid's name on the account doesn't help as your parents can change that at will (and control the disbursement of the money, anyway).

That's the part that happens before you put them in the nursing home after having them declared senile in court..haha.. If you have that parents that would do that, you have more pressing issues than a 529.

[staythecourse]

I'm pretty sure when you invest in a 529, the amount in the plan counts as the parents asset's when applying for financial aid. A 529 plan that is funded by the grandparents doesn't count as an asset at all when applying for financial aid.

Question: Is it illegal or immoral for my parents to fund my children's 529 plans if I just happen to gift my parents the same amount of money that they put in the plan?

No problem. If the government didn't feel it was "legal" they would be sure to have provisions in place to prevent what you wanted to do. They don't so go ahead and do it.

The only downside is the ownership of the account lies with the grandparents so they theortically could liquidate that money if they need arise, such as: health care needs, etc.

[sscritic]

No problem. If the government didn't feel it was "legal" they would be sure to have provisions in place to prevent what you wanted to do.

They have. They have provisions that prevent this from being called a gift. So he cannot give a gift to his parents in exchange for them contributing to a 529. Read the IRS definition of a gift above. The question then becomes whether he can buy a 529 contribution from his parents, or equivalently, can he contract them to open a 529 with his children as beneficiaries.

Do you give a gift to your local grocery store in exchange for food?

[xerty24]

he cannot give a gift to his parents in exchange for them contributing to a 529.

Ok, but what if they just have an informal, non-binding agreement that he'll give them money and they'll fund a 529 for his kid?

It's not a gift if there is a quid pro quo.

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

http://www.irs.gov/businesses/small/art ... ,00.html#2

I think the fact that you have to ask the question means you know the answer, but you don't like the answer you know.

Remember the 529 plan is an asset of the beneficiary's grandparents, at least until there's a 529 distribution. Unless OP would be getting a contract that specifies a debt to be repaid, via education spending or otherwise, it absolutely is a gift. Hint: If you have no recourse when the grandparents blow the money on a new house, it's a gift not a loan. I believe the law is clear on this point, assuming no additional contractual terms.

[555]

This seems relevant

http://www.finaid.org/savings/loophole.phtml

[segfault]

What the heck? I thought one of the features of 529 plans was supposed to be the ability for the middle class to save for college expenses without the funds being counted against you for financial aid purposes.

<-- pounds head against wall, but is thankful that he doesn't have any kids.

[Spirit Rider]

There is no reason to gift the money to the grandparents and have them deposit in 529. It is technically illegal as is quid pro quo gifting to get around gift exclusion limits.

The plans assets belong to the plan's owner. However, deposits to the plan are gifts to the beneficiaries. "Anyone" can make deposits once a plan is created. So parents can make contributions directly to the granparents 529 plan.

Others have identified several reasons why it is not such a slam dunk idea. I will add one more.

While the assets of a grandparents 529 are not counted. Disbursements made from 529s owned by grandparents or other unrelated parties are considered non taxed income to the "student" and are assessed at a much higher percentange.

Whereas, with the parents the assets are counted at the lower parental rate. However, the disbursements are not counted at all.

[sscritic]

I am an old fuddy-duddy, but please define these words for yourself:

ethical or moral

intent

financial gain

deceit

and wikipedia and the Collins English Dictionary will provide the definition of fraud:

According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".

With these definitions, do you see a moral problem with hiding the source of the funds in the "grandparents' 529" from the colleges?

Note that the fact that the grandparents might spend the money on themselves without using it as the OP intended doesn't change the OP's intent.

[happymob]

While the assets of a grandparents 529 are not counted. Disbursements made from 529s owned by grandparents or other unrelated parties are considered non taxed income to the "student" and are assessed at a much higher percentange.

Whereas, with the parents the assets are counted at the lower parental rate. However, the disbursements are not counted at all.

To make sure I am interpreting this correctly - in other words, pushing the 529 plan money into a grandparent's account might help the kid to qualify for financial aid initially (due to lower parental money), as soon as disbursements start, the kid might be less likely to qualify for financial aid due to higher non-taxed kid income.

[Oneanddone]

Spirit Rider is right on the mark with this one.

A grandparent can open the 529 plan. The parents can fund it. When the parents fund it, the contribution is treated as a gift to the child. However, the money belongs to the grandparent and the grandparent has the legal right to do whatever they would like with the money.

It is NOT treated as an asset for federal financial aid purposes. However, once the money is used, it is the equivalent of the child earning that same amount of money which makes it much worse for financial aid.

Overall, this strategy has risk and possible negative financial aid implications.

[EagertoLearnMore]

How old are your children? Have you looked at the FAFSA form - go to www.fafsa.gov Notice the .gov part.

Do you and your spouse have a decent earned income? The FAFSA puts the emphasis on income, not assets. Other forms (CSS) and private scholarships do ask about assets.

I would suggest you read the information regarding the FAFSA form before deciding how to fund the 529.

[centrifuge41]

It is NOT treated as an asset for federal financial aid purposes. However, once the money is used, it is the equivalent of the child earning that same amount of money which makes it much worse for financial aid.

Overall, this strategy has risk and possible negative financial aid implications.

I would only use a grandparent's 529 for paying for senior year due to the above.

[bvp]

I'm pretty sure when you invest in a 529, the amount in the plan counts as the parents asset's when applying for financial aid. A 529 plan that is funded by the grandparents doesn't count as an asset at all when applying for financial aid.

Question: Is it illegal or immoral for my parents to fund my children's 529 plans if I just happen to gift my parents the same amount of money that they put in the plan?

I'd say it is of dubious morality. Just realize that you are effectively giving that money to your parents - you lose complete control of it.

[fundseeker]

Sounds just like fraud to me. You know what you are intending to do, and it is conceal your ownership of that money. People go to jail for this behavior. Would there be any difference if you figured out a way to have your parents hold a liability (debt) for you so you could conceal that from a bank and take out a loan? If you do this, and then mail a related document or send the information via the internet, then you might be a candidate for a federal mail fraud or wire fraud charge. Probably not worth it, huh?

[555]

!!!SPAM!!!

this is quite interesting yet devilish.

[TomatoTomahto]

I think the fact that you have to ask the question means you know the answer, but you don't like the answer you know.

SScritic, I'm an "old fuddy-duddy" like you. I don't know as much about the law as you do, but I've got a nose that knows.

Claude

[wilked]

It is NOT treated as an asset for federal financial aid purposes. However, once the money is used, it is the equivalent of the child earning that same amount of money which makes it much worse for financial aid.

Overall, this strategy has risk and possible negative financial aid implications.

I would only use a grandparent's 529 for paying for senior year due to the above.

This

I honestly see no risk if used for a senior year thing. Have the parents fund $10K once the child is born into the 529. Give them $2K per year back on the sly, repaid in 5 years. No one is going to notice this money changing hands. Senior year the student should have $25-40K to pay down his/her schooling.

I see the odds of an ensuing audit as roughly 0%.

[pkh01l]

I'm pretty sure when you invest in a 529, the amount in the plan counts as the parents asset's when applying for financial aid. A 529 plan that is funded by the grandparents doesn't count as an asset at all when applying for financial aid.

Question: Is it illegal or immoral for my parents to fund my children's 529 plans if I just happen to gift my parents the same amount of money that they put in the plan?

Would the amount of money you put into this 529 plan really effect their financial aid calculations? If you have a good income and have saved a decent amount of money, your kids will likely not get any financial aid anyway. Now if you tell me you have not savings or assets to speak of other than the money you plan to put into the 529, them perhaps that is a different story.

Doesn't seem worth it to me.

[letsgobobby]

My parents own two of four 529s for our kids with funds we and they contributed. On the very off chance we qualify for any aid, we'll use the grandparents' owned 529s last. I don't see anything immoral or illegal about this.

[Sam I Am]

I'm hoping by funding a prepaid college program for each of the grandchildren, along with 529 plans, there will be little need to even worry about financial aid. I absolutely hate the idea of college debt, with a few exceptions, like medical school and such.

Though, what I am really hoping is the grandchildren are so capable they each bag a full ride scholarship at a top-tier university.

Sam I Am

[mmmodem]

I find it interesting on this board when it comes to 529 plans, there's always some morality question attached to it. Why? The money comes from the parent and goes directly to their children. They're just trying to maximize the amount that goes to them within the context of the law. Why is it devious to take advantage of loopholes? Aren't backdoor Roths loopholes? We're okay with that.

Anyway, based on what Spirit Rider and hsv_climber says, I'd say the risks of grandparents passing away outweigh the reward of using it just for senior year.

[TomatoTomahto]

I find it interesting on this board when it comes to 529 plans, there's always some morality question attached to it. Why? The money comes from the parent and goes directly to their children...

The difference, to me, is that in this case they're representing that it is NOT their money going directly to their children, but rather that it is the grandparents' money. Whether the law is fair or not is open to debate, but fraud is fraud even if it seems "moral" and "ethical."

If my employer were to pay me under the table, what's the problem? They're paying me for doing a job, right?

Claude

[Rodc]

I find it interesting on this board when it comes to 529 plans, there's always some morality question attached to it. Why? The money comes from the parent and goes directly to their children. They're just trying to maximize the amount that goes to them within the context of the law. Why is it devious to take advantage of loopholes? Aren't backdoor Roths loopholes? We're okay with that.

Anyway, based on what Spirit Rider and hsv_climber says, I'd say the risks of grandparents passing away outweigh the reward of using it just for senior year.

With a loop hole if you go to the government and say can I do such and such, they say yes. A loop hole in the law may have been unintentional by the law makers, but it there and still legal.

If you go to the government and ask can I do this gifting trick I don't think you will get the same answer (see sscritic above about what is and is not a gift).

Is it a huge deal? You can answer that for yourself. Are you likely to get caught? Likely not.

Over the years I have become more ethical in these things. What sort of lessons do I want to teach my children? How do I want to view myself, what sort of person do I want to be? What is my good name worth to me?

Everyone has to answer these thing for themselves. One easy way is to imagine doing this wide open with friends, neighbors, your boss watching. Would you be proud or embarrassed?

Some of you will find that over the top I know. But living that way makes living a lot easier.

[letsgobobby]

I find it interesting on this board when it comes to 529 plans, there's always some morality question attached to it. Why? The money comes from the parent and goes directly to their children. They're just trying to maximize the amount that goes to them within the context of the law. Why is it devious to take advantage of loopholes? Aren't backdoor Roths loopholes? We're okay with that.

Anyway, based on what Spirit Rider and hsv_climber says, I'd say the risks of grandparents passing away outweigh the reward of using it just for senior year.

Another advantage to this set up is that 529 plans are not part of either party's estate for tax purposes.

[epilnk]

My inlaws contribute to 529s every year for each of their grandchildren. Is it immoral or fraudulent for us to pay for a 50th wedding anniversary gift whose value approximates the value of this year's contributions?

[TomatoTomahto]

My inlaws contribute to 529s every year for each of their grandchildren. Is it immoral or fraudulent for us to pay for a 50th wedding anniversary gift whose value approximates the value of this year's contributions?

My take, and I'm not a lawyer, is that it's fine if it's not quid pro quo.

[TomatoTomahto]

My inlaws contribute to 529s every year for each of their grandchildren. Is it immoral or fraudulent for us to pay for a 50th wedding anniversary gift whose value approximates the value of this year's contributions?

PS And I'm sure that they haven't been contributing for years as a means to get you to give them a 50th wedding anniversary gift Congratulations to them; t'aint easy.

[archbish99]

The caution here, from what I've read, is this:
- UGMA accounts are assets of the student, and hurt you in the current year's financial aid calculation
- 529 accounts held by the parents are assets of the parents, and only count around 5% (since they're parental assets)
- 529 accounts held by someone else don't count toward financial aid at all for the current year.
- Disbursements from 529s held by someone else are income to the student and hurt you for financial aid the following year.

Student income hurts much more than a parental asset -- keep the 529 in your own name.

[Dianne]

I don't think this is fraud. It is not fraud because the government hasn't bothered to pass rules to make it fraudulent. And the government hasn't bothered to pass such rules because they know that this strategy will not be beneficial to very many people. (It is possible that the government is assuming that some people for whom it is not beneficial will foolishly do it anyway, so that the government will come out ahead, but I doubt it.)

Keep in mind the premise behind this strategy: The grandparents are making a gift to the grandchildren which they are not obligated to make. Any obligation destroys the financial aid benefits.

With that in mind, consider the total consequences of the strategy:

Tax Consequences: Upstream transfers like this one are usually bad tax planning when analyzed from the whole family perspective. They often shift future income into a higher income tax bracket, and they can subject the money to double or triple taxation under the estate and gift tax system. They can also trigger generation-skipping taxes that would not have been owed otherwise. Unintended consequences are likely. The fact that 529 plans are tax-deferred doesn't solve everything.

Medicaid Consequences: This strategy is really bad Medicaid planning. There is likely a high correlation between families that need financial aid and families that are relying (perhaps unknowingly) on means-tested government benefits to pay for long term care. If a grandparent needs nursing home care before the grandchild goes to college, the grandparent may be required to spend the 529 money on the long term care. If the grandchild uses the money for college, and then the grandparent needs long term care within 5 years, the family may be required to pay the money back, even though it has been spent. I'm oversimplifying the rules for brevity here, but it is safe to say that if the grandparents don't have long term care insurance or at least $5 million net worth, the family should not be manufacturing gifts. (And if the grandparents are over $5 million, see the previous paragraph.)

Legal Consequences: If the grandparent becomes incapacitated, he may not be legally able to make gifts without the consent of a judge. Can you rely on the judge to give that consent? The judge will focus on the best interests of the grandparent, not the grandkids. You won't be able to testify that the grandparent has any obligation, or that there was any pre-arranged plan to give the money back, because that's not true. Remember the premise from 4 paragraphs above. The same rules would apply if the grandparent declares bankruptcy. This is the grandparents' money, with no strings attached. You aren't entitled to have it spent on the grandkids, unless the grandparent is healthy, solvent, and willing to give it away at all relevant times.

So I would not recommend this strategy. Not because it's illegal or immoral, but because it is likely to cost the family more in taxes, health care expenses, and legal bills than it will save in tuition costs.

[fundseeker]

Yes, you can move your family's money around all you want and let others hold it for you, and that is not a crime until you make some misrepresentation to benefit yourself. So, when you misrepresent to some entity that your are poor because you have few assets (since your relatives are hiding them), when you actually are not poor, and you did this intentionally to deceive the entity and get financial assistance, then it is fraud, and there are plenty of state and federal laws against fraud. So if you play these games, you might want to read the fine print that often appears above the signature lines of some of the forms, because you might be certifying that your forms are true when they are false (or fraudulent).

[letsgobobby]

I find it interesting on this board when it comes to 529 plans, there's always some morality question attached to it. Why? The money comes from the parent and goes directly to their children...

The difference, to me, is that in this case they're representing that it is NOT their money going directly to their children, but rather that it is the grandparents' money.

Claude

That's because it is NOT their money any more. They gave it away. Irrevocably and unconditionally. The grandparents own it, their child is the beneficiary, and they no longer have access to the money unless - you've got it - they're receive a gift back.

Now if the FAFSA asks, "Did you put money into a 529 with one of your parents as owner and your children as beneficiary?" then the legal and morally correct answer is, "yes." Does the FAFSA ask that?

[archbish99]

I find it interesting on this board when it comes to 529 plans, there's always some morality question attached to it. Why? The money comes from the parent and goes directly to their children...

The difference, to me, is that in this case they're representing that it is NOT their money going directly to their children, but rather that it is the grandparents' money.

Claude

That's because it is NOT their money any more. They gave it away. Irrevocably and unconditionally. The grandparents own it, their child is the beneficiary, and they no longer have access to the money unless - you've got it - they're receive a gift back.

Now if the FAFSA asks, "Did you put money into a 529 with one of your parents as owner and your children as beneficiary?" then the legal and morally correct answer is, "yes." Does the FAFSA ask that?

And the grandparents are (immediately or at some point after a fight later) able to withdraw the money and pay the penalty, or able to change the beneficiary to one of their other grandchildren without asking/telling the parents.

[2stepsbehind]

It is neither illegal nor immoral. For all the posters claiming "quid pro quo" I'd just underscore that quid pro quo isn't inherently illegal unless there are specific laws preventing such behavior. In fact much of contract law is based upon it (i.e. consideration). Now whether this strategy should be employed is a different question altogether. Do you have any siblings? Seems like you could each agree to fund 529 plans for your nieces/nephews and potentially minimize the likelihood of estate issues popping up.

[dhodson]

http://whitecoatinvestor.com/who-should-own-the-529/

i just find this to be a waste of time for the potential possibility of what more loans for the most part?
Just isnt worth gaming it.

[letsgobobby]

Beyond loans there can be grants and work study, although for me that does become a bit more rivet morally.

[dhodson]

Sure but for most people it's loans. I'm not so worried about the morality but the practicality.