529 gift tax

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Topic Author
wee-wee
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529 gift tax

Post by wee-wee »

I've been advised by many different people not to contribute more than $15,000 per year per child to a 529 plan because the annual IRS gift tax exclusion is $15,000.

But the lifetime gift tax exclusion is $11.58 million.

Assuming my estate won't be near that amount when I die, is there any tax reason not to contribute more than $15k per year per child in a 529 plan?

Thanks for any comments.
codedude
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Re: 529 gift tax

Post by codedude »

wee-wee,

There isn't. But anytime one gives any one person over $15000 in a year, a gift tax form (form 709) needs to be filed for the year.

If you have a spouse, you can contribute $15000 to kid 1's 529, and your spouse can also contribute $15000 to kid 1's 529 in the same year.
mcraepat9
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Re: 529 gift tax

Post by mcraepat9 »

Note that you can also give 5 years of gifts to each of your kids in a single year via a 529 without dinging your estate tax credit (as long as you give no other gifts to them during the 5 year period). Search on this forum for 529 superfunding.
Amateur investors are not cool-headed logicians.
janezoey
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Re: 529 gift tax

Post by janezoey »

In some states, the estate tax threshold is much lower than the federal. For example, in Massachusetts, it's about $1 million per a person before estate taxes come in. But if it's $1 more than that first million, and you didn't set up any special trusts, then your ENTIRE estate will be taxed. An estate can include a home and life insurance proceeds. In MA, a widow usually inherits everything from a spouse untaxed, but if that couple didn't do any estate planning (i.e. create trusts), then their children or heirs will only get the $1 million exemption (not $2 million like you would presume with two people's assets).

So I would pay attention to filing those gift exclusion forms if you plan to superfund...
Topic Author
wee-wee
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Re: 529 gift tax

Post by wee-wee »

So I would pay attention to filing those gift exclusion forms if you plan to superfund...
Why? What is the benefit of using those forms and saving them possibly for many years? I do not understand.
fabdog
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Re: 529 gift tax

Post by fabdog »

Why? What is the benefit of using those forms and saving them possibly for many years? I do not understand.
Because it's what's legally required...

But past that... As you note the CURRENT estate limitations are far above what you think you'll have... but those have varied quite a bit over the last 20 years (at one point there was no limit) If the limits change in the future to a lower amount, it would be good to have the proof of what you did when the limits were higher

Mike
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UpsetRaptor
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Re: 529 gift tax

Post by UpsetRaptor »

Properly "superfunding" a 529 today does not count against the estate tax lifetime exclusion amount for an individual. So regardless of if the federal estate tax threshold were to drop in the future, or if you're in a state like MA where the estate tax is lower (but the form still starts with the federal estate tax form's value), it doesn't matter, because proper superfunding a 529 counts as $0.

In answer to your question OP, no, there is no tax reason why you couldn't/shouldn't contribute more than the $15K.

You could either directly contribute >$15K annually and file the Form 709 gift tax form and it applies to the lifetime exclusion amount, currently $11M. Or you could superfund and contribute up to $75K in one year and have it not apply to the lifetime exclusion amount, but you can't contribute again for another 5 years. No tax involved in either case, in your situation. If you're filing Married Filing Jointly, all these numbers are doubled.
fabdog
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Re: 529 gift tax

Post by fabdog »

Agreed. But you still need to file the 709 if you go above the $15k/person, or superfund. And then keep it, so you can prove it if the limits drop. Proper superfunding doesn't count against the exclusion but you still need a 709

Mike
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wee-wee
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Re: 529 gift tax

Post by wee-wee »

When would the 709 be filed? If I'm the owner and beneficiary of the 529, I assume I don't file a 709 until I change the beneficiary to one of my children?

(I'm the beneficiary, even though i'll ultimately use this savings for my children, for strange reasons)
fabdog
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Re: 529 gift tax

Post by fabdog »

yes, you'd file the 709 when you make your children the beneficiary

Mike
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UpsetRaptor
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Re: 529 gift tax

Post by UpsetRaptor »

If it's for a child, why are you the beneficiary? The $15K annual, $75K 5-yr superfund stuff in my prior post assumes you're contributing to 529 where the beneficiary is a child. If you load it up over time, through contributions and/or growth, with you as beneficiary and then change it to your child later, then the gift tax stuff all hits at once which could be much worse.

Edit: Actually, if you know you'll never be near the estate tax thresholds, it doesn't really matter.
Topic Author
wee-wee
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Re: 529 gift tax

Post by wee-wee »

If it's for a child, why are you the beneficiary?
I'm the child's step-father. His biological father is supposed to pay for college 100% when the time comes, but I doubt he will. I'm the beneficiary of the 529 so the biological father will never know that I've saved this money just in case. Make sense? If I ultimately dont need it, I have a younger child who will use the money.
ivk5
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Re: 529 gift tax

Post by ivk5 »

UpsetRaptor wrote: Thu Jan 09, 2020 4:13 pm Edit: Actually, if you know you'll never be near the estate tax thresholds, it doesn't really matter.
As noted above, nobody knows what the exemption will be in the future when OP dies.
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UpsetRaptor
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Re: 529 gift tax

Post by UpsetRaptor »

wee-wee wrote: Tue Jan 14, 2020 2:36 pm
If it's for a child, why are you the beneficiary?
I'm the child's step-father. His biological father is supposed to pay for college 100% when the time comes, but I doubt he will. I'm the beneficiary of the 529 so the biological father will never know that I've saved this money just in case. Make sense? If I ultimately dont need it, I have a younger child who will use the money.
Gotcha, makes sense.
Spirit Rider
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Re: 529 gift tax

Post by Spirit Rider »

UpsetRaptor wrote: Thu Jan 09, 2020 3:26 pm Or you could superfund and contribute up to $75K in one year and have it not apply to the lifetime exclusion amount, but you can't contribute again for another 5 years.
Small correction. If you make a five-year contribution. You can contribute the annual exclusion for the current year - (the five-year contribution / 5).
fourwheelcycle
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Re: 529 gift tax

Post by fourwheelcycle »

wee-wee wrote: Tue Jan 14, 2020 2:36 pm I'm the child's step-father. His biological father is supposed to pay for college 100% when the time comes, but I doubt he will. I'm the beneficiary of the 529 so the biological father will never know that I've saved this money just in case. Make sense? If I ultimately dont need it, I have a younger child who will use the money.
I am the owner of several Vanguard/Nevada 529s for our grandchildren. As far as I can tell, if I do not enter the names and contact info for the children's parents Vanguard will never notify them of the existence or balances of these 529 plans. So I think you could name your step-child as the beneficiary and fill out the 709s annually, or once for five years, as you fund the plan. If you don't list the biological father as a person to be notified they will never know the plan exists. Of course, you should check carefully with the 529 plan you are using to see if what I am saying about Vanguard is true for your plan.

Another surprising thing I have learned about 529 plans, at least at Vanguard, is that once you fund a plan for a particular individual, say your step-child, and submitted any necessary 709s, you can later move any portion of those funds, and associated earnings, to another 529 plan, like a plan for your biological child, without filling out any additional 709 forms.

So, if you wanted to do this, you could make your step-child the beneficiary of the plan you have already set-up, not designate anyone else to be notified about the plan and its balance, fund it as you wish and submit any necessary 709s, then (now or later) set-up a second 529 plan for your biological child and fund it by moving money from your step-child's 529 to your biological child's 529. Perhaps an expert will contradict my understanding, but as far as I can tell you could build up $100K or more in principal and earnings in the first 529 and then move it to the second 529 with no requirement to submit additional 529s.

I have heard about tax issues related to gifts resulting from transfers of 529s, but I am hazy about whether this involves changing beneficiaries or owners, and whether it involves new beneficiaries or owners who are not qualified relatives of the original beneficiary or owner - so I am sure there is an opportunity for an expert to clarify my comments.
fourwheelcycle
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Re: 529 gift tax

Post by fourwheelcycle »

fabdog wrote: Thu Jan 09, 2020 4:09 pm yes, you'd file the 709 when you make your children the beneficiary
I made my previous comment because I have no idea what you would say on a 709 form that you submit in six years or more when you change the beneficiary from yourself to either your step-child or your biological child, for example:

"Dear IRS, I have just made my child the beneficiary of a 529 plan I funded six years ago in the amount of $75K. At that time I did not submit a 709 form because I was the owner and beneficiary, so it was not a gift. Due to earnings over the past six years the 529 plan balance has now grown to $125K. I realize the plan value is now greater than the allowed maximum five year gift, but I am hopeful you will understand that the original funding amount was actually $75K. If you do not accept my proposed interpretation, and if I die in the future with a total estate larger than the lifetime estate tax exclusion, I realize my executor will have to report a $50K taxable gift amount on the Form 706 for my estate which will apply to my lifetime exclusion."
Spirit Rider
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Re: 529 gift tax

Post by Spirit Rider »

A 529 rollover or change of beneficiary to a lower generation is considered a new completed gift from the account owner to the new beneficiary. It is treated the same any other gift, subject to gift tax reporting rules. You don't write any such letter.

If your example, the best option would be to rollover 5X the annual exclusion (2020 = $75K). You would file Form 709 reporting the gift amount and electing the five year treatment. In 2021 - 2025 you could rollover the current annual exclusion - $15K (if any). In 2025 rollover up to 5X the annual exclusion reporting on Form 709. Rinse and repeat as necessary.

If you didn't want to or have the time use the incremental method described above. You could change the beneficiary or rollover the entire balance. You would file Form 709 reporting the entire amount as a gift. You would elect to treat 5X as a five-year exclusion and the remainder would be applied against your lifetime exclusion.

You would never need to write any letter as you described and there would be no way to send it anyway.
fourwheelcycle
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Re: 529 gift tax

Post by fourwheelcycle »

Post deleted.
Last edited by fourwheelcycle on Wed Jan 15, 2020 10:04 am, edited 1 time in total.
fourwheelcycle
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Re: 529 gift tax

Post by fourwheelcycle »

Spirit Rider wrote: Wed Jan 15, 2020 9:08 am A 529 rollover or change of beneficiary to a lower generation is considered a new completed gift from the account owner to the new beneficiary.
From this comment it appears moving 529 funds from your step-child's plan to your child's plan would not represent a new gift, since they are in the same generation.
Spirit Rider wrote: Wed Jan 15, 2020 9:08 am You would never need to write any letter as you described and there would be no way to send it anyway.
Actually, you can write any letter you want and include it with your regular taxes or your Form 709 submission (which goes to a different address). If you write a letter about your regular taxes and the IRS never sends you any notice you can conclude you do not owe any additional taxes or interest. You can also conclude your letter may or may not have been helpful or necessary.

Since the IRS will not be making any decision on currently owed taxes when you submit a Form 709 the IRS will only respond if you have filled out your Form 709 incorrectly. If you indicate a current five year gift of $125K but, in view of the rationale in your letter, you do not enter a $50K amount to be deducted from your lifetime estate tax exclusion, you may (or will?) receive a letter that you did not fill out the form correctly.

I intended my example letter as a humorous attempt convince the IRS a $125K gift is actually only a $75K gift. If I was the OP I would not make myself the beneficiary. In any event, I would submit a required Form 709 for any year in which I made a single year gift or a five year gift in excess of the applicable limit. I would fill out the form properly and I would not have to submit any letter describing special circumstances
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