529 as gift for child of niece/nephew

[SnowBog]

Curious if anyone has setup something like this? How did it go?

My initial thought is to setup the 529 with us as owners and our niece/nephew as beneficiary (and the Successor Participant should we die first) and then later change to their child (once they have SSN), or directly to their child (but have to wait until they have SSN). The advantage I see with this is there is "no dependencies" on niece/nephew (other than sharing SSN with us - theirs's or child's) and I believe this setup wouldn't count against them as much with financial aid as an account they "own" would.

For at least 1 of my niece/nephew's, I know they'll never get around to setting up a 529 on their own (hopefully they'll mature before they have kids). And I hate the idea of having to "wait" on them to do so. To keep things as "fair" as possible, doing something "we" can create/execute without them if needed is our preference. Unfortunately, that might end up meaning we'd have to name ourselves as beneficiary, then change to niece/nephew, then change to their child.

Edited to add: I had forgotten that with SECURE 2.0's 529 changes, if the 529 is unused/unneeded - it could be used to fund contributions to a Roth IRA when the kids start working, up to $35k - which is likely what we'll remain under.

[Rex66]

Some people worry that a 529 will decrease financial aide

Now this typically is loans but without a lot more details I’d be hesitant to do this in secret

[SnowBog]

For clarity - definitely would not be done in secret... The parents (niece/nephew) would know, and they'd need to provide us an SSN eventually (ideally the child's - so they would be listed as beneficiaries).

Currently the age range of niece/nephew's is between 16 - 30. Baring something unexpected, I'm expecting most of them to be "working class" with mostly "blue collar" jobs.

The first one (and spouse) might be on a path to "middle class", one is college educated with reasonable career prospects ahead of them - the other didn't finish college but has worked their way up in their industry.

The others - too early to tell, but they don't seem on a track for a highly educated/highly compensated role. Thus, expectation is based on "parent's income/assets" - they should qualify for reasonable amount of financial aid. And I don't want to negatively impact that in a major way...

But we also want to help open doors/avenues for the kids going forward...

[peteyboy]

I get the skip generation aspect but I’ll be honest, I think this is a little weird. If you set up the account and put yourself as the beneficiary initially you can always change it later. Nor do you have to get anyone involved initially. I do believe your intentions are honorable but can’t see the upside of doing it your proposed way. However, I can see how it might create some unintended yet significant family relationship issues down the line. Sorry for being so blunt.

[SnowBog]

No apologies necessary - I'm looking for feedback!

If you set up the account and put yourself as the beneficiary initially you can always change it later.

As I understand it - this won't work - as the child of my niece/nephew is "outside" the IRS's definition of family.

Or more specifically, the only way setting myself as beneficiary would work is if:

• We give-up any tax-advantages of 529 (as they are "outside" the tax-free transfer)
• We switch the beneficiary twice, potentially to niece/nephew and then again to their child...

At least that's how I understand: https://www.savingforcollege.com/articl ... eneficiary. As the "beneficiary", I can change to my niece/nephew but not their child.

[cchrissyy]

the kids aren't born yet?

i wouldn't be inclined to jump through the hoops to open and edit 529s, not due to the effort but more due to how little anybody knows about what college costs and financial aid policies are going to look like 20 or 30 years from now.

what i would do instead is make a decision in my own head to pay for college, which i will tell them at the right time if i am alive, and it would be a written in my will or trust in case i am not there.

[SnowBog]

the kids aren't born yet?

Not yet - but the first one is on the way! (Hopefully others are far away - as again the youngest niece/nephew is still in high school...)

what i would do instead is make a decision in my own head to pay for college, which i will tell them at the right time if i am alive, and it would be a written in my will or trust in case i am not there.

For clarity, we aren't intending to pay for all of college... Just "help"... Again, thinking of something like $3k at birth. In theory, that might pay 1-year of in-state tuition (obviously depends on changes to college costs over the next 20+ years).

So, the idea of "setting aside" that money as needed ($3k at birth) shouldn't be hard to deal with, especially if it can grow tax-free (and require no extra overhead other than setup effort) is appealing to us.

Our other option might just be giving the parents (niece/nephew) $3k (or whatever we decide on) - and "let them deal with it" however they want... For this first child - we are 100% OK with that - we know that they'll make wise use of the money. Just trying to "think ahead", as the others may not be as "wise" - and our intent is the money is for their children - not whatever "toy" the parents want.

[CrazyCatLady]

No apologies necessary - I'm looking for feedback!

If you set up the account and put yourself as the beneficiary initially you can always change it later.

As I understand it - this won't work - as the child of my niece/nephew is "outside" the IRS's definition of family.

Or more specifically, the only way setting myself as beneficiary would work is if:

• We give-up any tax-advantages of 529 (as they are "outside" the tax-free transfer)
• We switch the beneficiary twice, potentially to niece/nephew and then again to their child...

At least that's how I understand: https://www.savingforcollege.com/articl ... eneficiary As the "beneficiary", I can change to my niece/nephew but not their child.

I’d be interested to see if anyone has figured out how to do this. I was thinking about setting up a 529 plan for my niece’s son, but didn’t for the reasons you mentioned.

[Jovby]

So, the idea of "setting aside" that money as needed ($3k at birth) shouldn't be hard to deal with, especially if it can grow tax-free (and require no extra overhead other than setup effort) is appealing to us.

I actually really like this idea. You can set it up, and then it compounds without any tax consequences.

I don't think you need to worry about the generation-skipping transfer tax as the annual and lifetime gift tax exemption can deal with that. Also the double beneficiary change would work.

I believe the rules for changing account owners vary by state. Some allow it, and others require special circumstances such as death or divorce. You might pick a plan that would allow you to transfer ownership to your niece/nephew if needed, just to give yourself that option in the future.

[Jovby]

Edited to add: I had forgotten that with SECURE 2.0's 529 changes, if the 529 is unused/unneeded - it could be used to fund contributions to a Roth IRA when the kids start working, up to $35k - which is likely what we'll remain under.

529 plans can also be transferred to ABLE accounts for those with disabilities, in the unfortunate situation that that applies.

[SnowBog]

Edited to add: I had forgotten that with SECURE 2.0's 529 changes, if the 529 is unused/unneeded - it could be used to fund contributions to a Roth IRA when the kids start working, up to $35k - which is likely what we'll remain under.

529 plans can also be transferred to ABLE accounts for those with disabilities, in the unfortunate situation that that applies.

Obviously, would prefer a happy healthy grand-niece/-nephew - but it's good to know that option exists if needed!

[SnowBog]

So, the idea of "setting aside" that money as needed ($3k at birth) shouldn't be hard to deal with, especially if it can grow tax-free (and require no extra overhead other than setup effort) is appealing to us.

I actually really like this idea. You can set it up, and then it compounds without any tax consequences.

I don't think you need to worry about the generation-skipping transfer tax as the annual and lifetime gift tax exemption can deal with that. Also the double beneficiary change would work.

I believe the rules for changing account owners vary by state. Some allow it, and others require special circumstances such as death or divorce. You might pick a plan that would allow you to transfer ownership to your niece/nephew if needed, just to give yourself that option in the future.

The "challenge" as I see it, is I can't do this without help from someone on the "family tree" above...

As an example, my initial thought was create the account with "me" as the beneficiary, fund it at birth, and then switch the beneficiary to the new baby once they have the social security card. But they are "outside" the IRS family definition... Not sure if that just means someone owes taxes on any gains when that occurs - which obviously are less of it happens quickly.

Alternatively, I could see if my niece/nephew are willing to share their SSN, and then it shouldn't be an issue to change things. (Which might even work with me as the "original" beneficiary, if we change it first to my niece/nephew and then to their child.)

The idea I like the least is "waiting" for the child's SSN. My concern is that it will take an indeterminate amount of time for them to get and share that with us. Some might take years (if ever). And I don't want the parents to get in the way of something we are trying to do for their children (which they'll probably care more about as the kids get older - but by then they'd have lost years of growth).

[fourwheelcycle]

The idea I like the least is "waiting" for the child's SSN. My concern is that it will take an indeterminate amount of time for them to get and share that with us. Some might take years (if ever). And I don't want the parents to get in the way of something we are trying to do for their children (which they'll probably care more about as the kids get older - but by then they'd have lost years of growth).

If the parents do not want you to do this, you should not try to do it. If the parents agree to help you do this, they will probably have the baby's SSN within two weeks. For our grandchildren, the hospitals submitted all the necessary info to the SSA and the parents had the new SSN very quickly.

[SnowBog]

The idea I like the least is "waiting" for the child's SSN. My concern is that it will take an indeterminate amount of time for them to get and share that with us. Some might take years (if ever). And I don't want the parents to get in the way of something we are trying to do for their children (which they'll probably care more about as the kids get older - but by then they'd have lost years of growth).

If the parents do not want you to do this, you should not try to do it. If the parents agree to help you do this, they will probably have the baby's SSN within two weeks. For our grandchildren, the hospitals submitted all the necessary info to the SSA and the parents had the new SSN very quickly.

Obviously, if the parents don't want this - we wouldn't do it. We aren't going to go against their wishes.

A "no" is easy to accept.

My concern is less they don't "want this", and more "they don't get around to it" - or don't get around to it for years. Obviously this depends on how mature they are in their lives when they have kids...

If they don't tell us "no", I don't want to have to ask them repeatedly - nor add to their stress - with having to deal with getting SSN numbers. And I don't want the child to lose out on months/years of compound growth (which many of them don't understand). In part, as it would bug me as "unfair" that the child with "responsible" parents ended up getting X months more growth than others.

[skp]

I can only tell you what we decided to do.
I didn't do an HSA. I don't know if my grandchildren will go to college or if it would be beneficial to even encourage/ expect them to go to college. Maybe they will need the money more for other things like special schooling before college, braces, enormous health care expenses. Maybe they'd be better off with a down payment on a house or a car instead of college money. Also, I don't want to affect their financial aid if they do go to college.
So, I put their "HSA" money in a dedicated separate account, still in my name but their money, which can be used for whatever their needs are. My ILs did the same thing for our children. \I've also read that the current generation is wary about giving out social security numbers.

[SRenaeP]

Some people worry that a 529 will decrease financial aide

Now this typically is loans but without a lot more details I’d be hesitant to do this in secret

The 529 belongs to the account owner. If the owner isn't the parent/guardian or student, the existence of the account will NOT impact financial aid. However, once the student (beneficiary) starts drawing from the 529, that is considered income. As such, that can impact financial aid. For that reason, some planners recommend not making 529 withdrawals until junior year, after the FAFSA for the senior year has already been submitted.

[SnowBog]

Some people worry that a 529 will decrease financial aide

Now this typically is loans but without a lot more details I’d be hesitant to do this in secret

The 529 belongs to the account owner. If the owner isn't the parent/guardian or student, the existence of the account will NOT impact financial aid. However, once the student (beneficiary) starts drawing from the 529, that is considered income. As such, that can impact financial aid. For that reason, some planners recommend not making 529 withdrawals until junior year, after the FAFSA for the senior year has already been submitted.

OK, so that explains why I've seen it noted that a 529 not "owned" by the parents would be "better" from a financial aid perspective. I guess I "assumed" they'd need to list any 529`s where they - or their children - were "beneficiaries". But sounds like that's not the case, it's just the "income" side that shows up when they withdraw fund, and waiting for their Junior year might avoid all financial aid implications!