Generation skip tax and 529 plan?

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staythecourse
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Generation skip tax and 529 plan?

Post by staythecourse » Mon Apr 11, 2011 9:24 am

I am assuming a GST is in effect when a grandparent gifts through a 529 plan to a grandchild.

If that is correct, is below a loophole around it:

A grandparent just opens one in their own child's name as the beneficiary then they change the beneficiary to their child's child (which counts as a family member exempt from taxation).

Feedback appreciated.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Oneanddone
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Re: Generation skip tax and 529 plan?

Post by Oneanddone » Mon Apr 11, 2011 10:12 am

staythecourse wrote:I am assuming a GST is in effect when a grandparent gifts through a 529 plan to a grandchild.

If that is correct, is below a loophole around it:

A grandparent just opens one in their own child's name as the beneficiary then they change the beneficiary to their child's child (which counts as a family member exempt from taxation).

Feedback appreciated.


This is one of those illogical things about 529 plans. The grandfather owns the money and has complete control over what happens, yet putting money in is treated as a gift to the beneficiary. Beneficiaries have no say in anything that happens. When a beneficiary is changed, it is treated as a gift from the old beneficiary to the new beneficiary.

Let's follow this through:

George=grandfather
Jim=father
Charlie=grandson

1)Grandpa George opens up a 529 plan with his divorced son,Jim, as the beneficiary. Grandpa George (and grandma) contribute $130,000 using 5 years of gifts.
There are no tax ramifications unless death occurs within 5 years.

2)Grandpa George changes the beneficiary to his grandson, Charlie. By doing this, his son, Jim, has just made a gift of $130,000 to Charlie. Even with 5 years of gifting, Jim has just cut into his lifetime gifting by $65,000.

It's irrelevant that Jim had no control and may not even know about the money.

sscritic
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Post by sscritic » Mon Apr 11, 2011 10:17 am

Is an individual grandparent giving more than $65,000?

You are allowed to claim the gift tax annual exclusion currently allowable with respect to your reported direct skips (other than certain direct skips to trusts—see Note below), using the rules and limits discussed earlier for the gift tax annual exclusion. However, you must allocate the exclusion on a gift-by-gift basis for GST computation purposes. You must allocate the exclusion to each gift to the maximum allowable amount and in chronological order, beginning with the earliest gift that qualifies for the exclusion. Be sure that you do not claim a total exclusion of more than $13,000 per donee.

Note. You may not claim any annual exclusion for a transfer made to a trust unless the trust meets the requirements discussed under Part 2—Direct Skips.
http://www.irs.gov/pub/irs-pdf/i709.pdf

As I understand it, you only owe GST tax on gifts that are otherwise subject to the Gift Tax. If your gift is not subject to gift tax, I don't believe it will be subject to the GST tax (but you still have to file form 709 and list it).

staythecourse
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Post by staythecourse » Mon Apr 11, 2011 10:36 am

Okay back to my original question:

If the grandparent changed the beneficiary from their son to the son's son then it would not be taxable occurrence, but would be liable under the gift tax exemptions?

I thought a change in beneficiary is not taxable not liable under gift tax exemptions. Guess I am wrong. Anybody have some insight or links?

Thanks.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Oneanddone
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Joined: Sun Dec 12, 2010 10:39 am

Post by Oneanddone » Mon Apr 11, 2011 10:43 am

staythecourse wrote:Okay back to my original question:

If the grandparent changed the beneficiary from their son to the son's son then it would not be taxable occurrence, but would be liable under the gift tax exemptions?

I thought a change in beneficiary is not taxable not liable under gift tax exemptions. Guess I am wrong. Anybody have some insight or links?

Thanks.


You are incorrect. There is a gift tax exemption if it is to the same generation.

Ex. If the beneficiary was changed from the father to the father's brother, there would be no taxation issues.

If the beneficiary was changed from the father to the father's son, the father has made a gift.

Don't look for logic.

I would assume that what you are thinking about is changing beneficiaries between siblings.

sscritic
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Post by sscritic » Mon Apr 11, 2011 11:31 am

I don't know what you mean by "liable under the gift tax exemptions." You can be liable for a tax or exempt from a tax, but I don't see how you can be liable under an exemption.
A 529 account owner can change the beneficiary without tax consequences if the new beneficiary is a member of the family of the old beneficiary and the new beneficiary is, for generation-skipping transfer tax purposes, assigned to the same generation as the old beneficiary. A “member of the family” is defined in Internal Revenue Code section 529, but includes, among others, siblings, descendants, parents and cousins.

Thus a parent can change the beneficiary from one child to another child and a grandparent can change the beneficiary from one grandchild to another grandchild without adverse tax consequences. If the new beneficiary is not a member of the family of the old beneficiary, the change will be treated as a non-qualified distribution and the earnings portion of the account will be subject to income tax and the 10% penalty. In addition, the IRS may treat the change of beneficiary as a new gift to an account for the new beneficiary.

If the new beneficiary is a member of the family of the old beneficiary but is in a later generation—for example, if the beneficiary is changed from a child to a grandchild—then the change is treated as a gift. The IRS is unclear at this point whether the gift is from the old beneficiary or from the account owner to the new beneficiary. Whoever is deemed to be making the gift could apply his or her gift-tax annual exclusions and even make the five-year election to mitigate the tax consequences of the gift.
http://www.fa-mag.com/component/content ... Itemid=180

staythecourse
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Post by staythecourse » Mon Apr 11, 2011 11:51 am

sscritic wrote:I don't know what you mean by "liable under the gift tax exemptions." You can be liable for a tax or exempt from a tax, but I don't see how you can be liable under an exemption.
A 529 account owner can change the beneficiary without tax consequences if the new beneficiary is a member of the family of the old beneficiary and the new beneficiary is, for generation-skipping transfer tax purposes, assigned to the same generation as the old beneficiary. A “member of the family” is defined in Internal Revenue Code section 529, but includes, among others, siblings, descendants, parents and cousins.

Thus a parent can change the beneficiary from one child to another child and a grandparent can change the beneficiary from one grandchild to another grandchild without adverse tax consequences. If the new beneficiary is not a member of the family of the old beneficiary, the change will be treated as a non-qualified distribution and the earnings portion of the account will be subject to income tax and the 10% penalty. In addition, the IRS may treat the change of beneficiary as a new gift to an account for the new beneficiary.

If the new beneficiary is a member of the family of the old beneficiary but is in a later generation—for example, if the beneficiary is changed from a child to a grandchild—then the change is treated as a gift. The IRS is unclear at this point whether the gift is from the old beneficiary or from the account owner to the new beneficiary. Whoever is deemed to be making the gift could apply his or her gift-tax annual exclusions and even make the five-year election to mitigate the tax consequences of the gift.
http://www.fa-mag.com/component/content ... Itemid=180


Thanks for the link.

BTW, if you are going to nit pick language you should open a dicitionary and know the word you are trying to criticize some else for using. Below is the defition of "liable" from Miriam Webster:

Liable: a: obligated according to law or equity : responsible

So I used it just fine!
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Oneanddone
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Joined: Sun Dec 12, 2010 10:39 am

Post by Oneanddone » Mon Apr 11, 2011 12:26 pm

SSCritic, do you have any commentary on the bolded part?:

If the new beneficiary is a member of the family of the old beneficiary but is in a later generation—for example, if the beneficiary is changed from a child to a grandchild—then the change is treated as a gift. The IRS is unclear at this point whether the gift is from the old beneficiary or from the account owner to the new beneficiary. Whoever is deemed to be making the gift could apply his or her gift-tax annual exclusions and even make the five-year election to mitigate the tax consequences of the gift.


My understanding has always been that it is from old beneficiary to new beneficiary and I've never read anything that has made me think otherwise. Have you read anything other than the quote?

Of course, there is the obvious that it makes no sense for it to be treated as a gift from the old beneficiary since they have no control. Of course, it also makes no sense that the same person, the owner, can gift the exact same money twice.

sscritic
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Post by sscritic » Mon Apr 11, 2011 1:18 pm

If you read the actual law (one of my new favorite pastimes), you will see that it is not clear on this point. 26 USC 529(c)(5):
(5) Other gift tax rules
For purposes of chapters 12 and 13—
(A) Treatment of distributions
Except as provided in subparagraph (B), in no event shall a distribution from a qualified tuition program be treated as a taxable gift.
(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.
http://www.law.cornell.edu/uscode/26/us ... 00-.html#c

Chapter 12 is gift tax; chapter 13 is tax on generation skipping transfers. Unless the exception applies, a gift tax (and a gst) tax may be due. The code doesn't say who the gift is from and thus who is liable for any gift or gst tax. However, previously, 26 USC 529(c)(2) says
(2) Gift tax treatment of contributions
For purposes of chapters 12 and 13—
(A) In general
Any contribution to a qualified tuition program on behalf of any designated beneficiary—
(i) shall be treated as a completed gift to such beneficiary which is not a future interest in property, and
(ii) shall not be treated as a qualified transfer under section 2503 (e).


Clearly, this section applies to the gift from the original donor. Since the label on (c)(5) is "other gift tax rules" my first reading would be that it is intended to apply to the original donor and not the beneficiary. But (c)(2) says the gift is a completed gift, so presumably it "belongs" to the beneficiary.

In short, who knows? Not until someone makes a transfer and a case goes to court that hangs on who is liable for any gift or gst taxes will we have an answer.

Oneanddone
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Post by Oneanddone » Tue Apr 12, 2011 5:34 am

Thanks for the response. You are correct that is unclear from reading the law.

All that I know is that every account with whom I have had this discussion has treated it as a gift from the old beneficiary to the new beneficary and that is also the same as everything that I have read. However, without a court challenge or at least an audit or a private letter ruling, or someting, I should go on the assumption that I may be incorrect.

Regardless, no matter which way they treat this, we need to suspend logic.

Bacchus01
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Re: Generation skip tax and 529 plan?

Post by Bacchus01 » Thu Oct 05, 2017 4:58 pm

So. If I open an account for myself, and then move it to one of my children, what are the issues?

I also contribute to my son's account. If I then later change the beneficiary on my son's account (which now has comingled funds that were put in his account and funds that were moved to his account from me), to HIS son, what are the issues?

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