529 Plan - grandmother or son?

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jimmy
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529 Plan - grandmother or son?

Post by jimmy » Thu Apr 19, 2018 1:49 pm

A widowed friend downsized homes and came into some extra money and wants to help her son. Her son (who is married) would like to have 529’s set up for his girls (7,10). She lives in CA and he lives in VA. Can she gift money to her son and have the son set up the 529’s in VA? Living in VA and using the Virginia 529 plan would give him a 4k state tax deduction per plan with a carryover of unused deductions. The other option is having her (grandmother) set up the 529 plans in CA (no state tax benefit). Not sure of the amounts she plans on giving but it could be anywhere from 15k to 75k per child. She would be willing to gift 15k/year if that made things simpler. Widowed friend is financially independent, paid off house, pensions, and significant investments. Is it worth trying to have the son set up the 529 plan in VA (state tax benefit) or just having the grandmother set up 529’s in CA as the owner with the option of gifting up to 75k (5 year catch up) to each child? Any feedback is appreciated..

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UpsetRaptor
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Re: 529 Plan - grandmother or son?

Post by UpsetRaptor » Thu Apr 19, 2018 2:36 pm

Because of the 5-yr 529 gift tax spread rule, she could gift up to $75K per grandchild straight into their 529 fund. If it was me, I'd tell Son to open a 529 on his end in VA for each daughter and go get a uGift 529 code, and do the lump sum $75K gift into each to start the tax free gains clock. That'd still leave the option available to Son to additionally contribute up to $4k per yr per account on his own if he wishes, to still get the state deduction.

Edit: If Son has zero intention of ever contributing anything of his own, then she could just open a 529 herself from somewhere (pick a state with good investment options). No difference except she'd own it.

jimmy
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Re: 529 Plan - grandmother or son?

Post by jimmy » Thu Apr 19, 2018 3:48 pm

Thx UpsetRaptor.. A few follow up questions for more clarity. Just to be clear son can set up account as owner and she (grandmother) can gift 75k per grandchild under the 5-yr 529 gift tax spread rule? Wasn't aware of uGift but I'll look into that. Is there a reason why you have a preference of uGift over just sending a check directly to the 529 plan sponsor? One more question.. if she makes a gift to the grandkids 529 plans is that considered a gift to the son (owner of the plan) or to the grandkids (beneficiary of the plan)? Reason I ask is she may still want to gift some money to the son.

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UpsetRaptor
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Re: 529 Plan - grandmother or son?

Post by UpsetRaptor » Fri Apr 20, 2018 9:06 am

Yes, if son sets up account as owner, with grandchild as beneficiary, grandma can contribute under 5 yr spread rule. It's considered a gift to beneficiary, not son, so future gifts to son could still occur. If you use VA plan so Son could potentially make future deductible contributions, the gift should be through https://www.virginia529.com/give-a-gift/. Doesn't look like VA uses uGift, my bad, only mentioned because many states do.

jimmy
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Re: 529 Plan - grandmother or son?

Post by jimmy » Fri Apr 20, 2018 10:50 am

got it.. Very helpful, thanks much. I like the idea that the son has the option to contribute some for tax deduction..

VonRyan
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Re: 529 Plan - grandmother or son?

Post by VonRyan » Fri Apr 20, 2018 11:13 am

My parents gifted money to me which I put in a 529 fund. My children were listed as the beneficiaries, and I made myself sole trustee because I was already having doubts about my wife's behavior at the time the gifts were made and the 529 was opened.

And then there was a divorce. Fortunately my ex-wife had a lousy attorney who forgot to put the 529 into the divorce settlement, so the 529 money from my parents is intact but I could have easily lost half of the 529 to my ex-wife.

The state income tax benefits from a 529 are tiny compared to the potential loss of tens of thousands from the 529 if there is a divorce, so having a grandparent or trusted relative be the trustee could be a good idea.

Spirit Rider
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Re: 529 Plan - grandmother or son?

Post by Spirit Rider » Fri Apr 20, 2018 12:39 pm

One thing to keep in mind when it comes to a parent vs. grandparent owner of a 529 account. If the parent's/student's financial circumstances will be such that the student will be eligible for financial aid. A parent or student and grandparent owned 529 account are assessed differently for purposes of the FAFSA Expected Family Contribution (EFC).

A parent or student owned 529 is considered a parental asset assessed at a maximum EFC rate of 5.64% and the distributions are exempt from income assessment to the student. A third party (not parent or student) including a grandparent owned 529 is exempt from both the parent's and the student's asset assessment but distributions are considered non-taxable income to the student assessed at a crippling rate of 50%.

Starting with the 2017/18 school year FAFSA uses the prior prior year. Third party 529 distributions after the 1/1 of the second to last year of school do not interfere with the FAFSA and financial aid. This means that the last five semesters of school are not subject to FAFSA EFC calculations.

If the parent's/student's assets and income will qualify for financial aid the ideal 529 allocation is; 3/8 parent, 5/8 grandparent and if no grad school the ideal allocation is 7/12 parent and 5/12 grandparent. Since it is probably impossible to know if the child will go to grad school, the mix should probably be 1/2 parent and 1/2 grandparent.

Even if this does not end up being useful because the parent's assets/income prevents and finacial aid, it causes no harm.

jimmy
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Re: 529 Plan - grandmother or son?

Post by jimmy » Fri Apr 20, 2018 1:21 pm

VonRyan wrote:
Fri Apr 20, 2018 11:13 am
My parents gifted money to me which I put in a 529 fund. My children were listed as the beneficiaries, and I made myself sole trustee because I was already having doubts about my wife's behavior at the time the gifts were made and the 529 was opened.

And then there was a divorce. Fortunately my ex-wife had a lousy attorney who forgot to put the 529 into the divorce settlement, so the 529 money from my parents is intact but I could have easily lost half of the 529 to my ex-wife.

The state income tax benefits from a 529 are tiny compared to the potential loss of tens of thousands from the 529 if there is a divorce, so having a grandparent or trusted relative be the trustee could be a good idea.
Yes I can see how a divorce could mess things up and I only hope the other ex spouse would honor the 529 for the benefit of the children, but who knows, anything can happen. Thanks for bringing up this point.

likegarden
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Re: 529 Plan - grandmother or son?

Post by likegarden » Fri Apr 20, 2018 2:15 pm

We did that, our son set up a 529 for our only grandchild in NY state using Vanguard index funds, and we sent moneys directly into that 529 during last 2 years. That 529 has enough money for 5 years in a NY state college. In case we would ever need Medicaid, that 529 is secure.

Spirit Rider
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Re: 529 Plan - grandmother or son?

Post by Spirit Rider » Fri Apr 20, 2018 2:27 pm

jimmy wrote:
Fri Apr 20, 2018 1:21 pm
VonRyan wrote:
Fri Apr 20, 2018 11:13 am
My parents gifted money to me which I put in a 529 fund. My children were listed as the beneficiaries, and I made myself sole trustee because I was already having doubts about my wife's behavior at the time the gifts were made and the 529 was opened.

And then there was a divorce. Fortunately my ex-wife had a lousy attorney who forgot to put the 529 into the divorce settlement, so the 529 money from my parents is intact but I could have easily lost half of the 529 to my ex-wife.

The state income tax benefits from a 529 are tiny compared to the potential loss of tens of thousands from the 529 if there is a divorce, so having a grandparent or trusted relative be the trustee could be a good idea.
Yes I can see how a divorce could mess things up and I only hope the other ex spouse would honor the 529 for the benefit of the children, but who knows, anything can happen. Thanks for bringing up this point.
There are a couple of misstatements above. There is no "trustee" of a 529 account. Each 529 is has a single account "owner". You couldn't have made it joint if you wanted to. As account owner you can spend a 529 on anything you want including yourself. You just have to pay taxes and a 10% penalty on the pro-rated earnings of any non-qualified distribution. This is why it is a marital asset for purposes of divorce.

If a grandparent is really worried about protecting 529 assets from a potential ex-spouse-in-law. They could as I suggested before, contribute 1/2 to a 529 they own and the other 1/2 to a UTMA 529 account owned by the child. The custodian has a fiduciary responsibility to the beneficiary. The disadvantage of this is that the custodian can not do a rollover to another beneficiary. However, when the UTMA beneficiary reaches the age of UTMA termination and full control. As the owner they can rollover 529 assets to another family member.

VonRyan
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Re: 529 Plan - grandmother or son?

Post by VonRyan » Fri Apr 20, 2018 3:31 pm

jimmy wrote:
Fri Apr 20, 2018 1:21 pm
VonRyan wrote:
Fri Apr 20, 2018 11:13 am
My parents gifted money to me which I put in a 529 fund. My children were listed as the beneficiaries, and I made myself sole trustee because I was already having doubts about my wife's behavior at the time the gifts were made and the 529 was opened.

And then there was a divorce. Fortunately my ex-wife had a lousy attorney who forgot to put the 529 into the divorce settlement, so the 529 money from my parents is intact but I could have easily lost half of the 529 to my ex-wife.

The state income tax benefits from a 529 are tiny compared to the potential loss of tens of thousands from the 529 if there is a divorce, so having a grandparent or trusted relative be the trustee could be a good idea.
Yes I can see how a divorce could mess things up and I only hope the other ex spouse would honor the 529 for the benefit of the children, but who knows, anything can happen. Thanks for bringing up this point.
A friend has run into just this: his ex-wife doesn't value education or saving for the future and once the ink was dry on the divorce decree she liquidated her half of the 529.

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munemaker
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Re: 529 Plan - grandmother or son?

Post by munemaker » Fri Apr 20, 2018 10:02 pm

The VA 529 plan is really good. On top of offering the Vanguard Total Stock Market fund at low expense ratio, it has a really nice feature. Set the fund up in the son's name as owner. Mom can be added to the account in a way that she can view it and deposit money but not make any changes to the account (don't remember what the refer to this as, not as owner though). And...the really nice part...regardless of who deposits the money in a VA 529 plan, under VA law, the account owner (son) can deduct it for state taxes. On top or that, in PA the person who contributes to a 529 account can deduct from PA state taxes. So...if a VA resident owns and 529 account and a person in PA contributes to that 529 account, the state tax deduction can be made in both states. Pretty cool, huh? Not sure if 529 contributions are deductible from CA taxes, but it might work.

So no reason to gift. Just add mom's name to the 529 plan so she can contribute and possibly get a state tax deduction.

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