Implications of Flexible 529 Beneficiary Designations

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Implications of Flexible 529 Beneficiary Designations

Post by renzop »

I am a NY resident in my 40s and have two niece/nephews who I want to make some small contributions to future education expenses (their approximate college age is about 10 years from now). My current plan is to open two NY529 plans, and contribute $2500/yr to each (maximizing the $5K/yr NY tax exemption as a single filer).

However, been researching all the past 529 threads here and I’m still very confused as to the various trade offs in my situation for listing either myself vs the children (I do have their SSNs) the beneficiary of record for now, especially with regards to tax implications with beneficiary transfers. My factors:
  • My understanding is that for FAFSA purposes, it would be beneficial to list myself as the beneficiary, and only change the beneficiary to the children in their sophomore year. However, it’s unclear to me under current regulations whether doing so may incur additional gift taxes at the time of beneficiary change, or eat out of my lifetime gift exclusion.
  • I would also like to maintain the flexibility to change the beneficiaries in the future, for example if I have my own children at some point — currently this seems less likely, but you never know (I do not plan to inform my sibling of the existence of these 529 plans until closer to distribution for this reason). If my goal is to maintain the potential flexibility to change the beneficiary to my own child in the future, from tax purposes is it more advantageous to have the current beneficiary be myself, or my sibling’s children?
  • Potential complicating factor here is that due to my age, if I have my own future children, they would be more than 37.5 years younger than me, so it’s unclear to me if/how “generation skipping” tax rules might inadvertently affect things here.
I recognize the rules surrounding 529s may change in the future, but trying to make the best decision for now. Appreciate the collective wisdom of this forum as always.
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Re: Implications of Flexible 529 Beneficiary Designations

Post by RetiredCSProf »

In some states, income tax benefits are available only to account owners who contribute to their own 529 plan. I don't know the rules in NY.

For FAFSA purposes, the 529 fund is counted as assets of the owner, not the beneficiary, even though it is considered as a completed gift to the beneficiary. A 529 fund can be "superfunded" for five years. That is, you can gift up to five years ($75K, using the current gift exclusion of $15K per year) without having to submit a tax form regarding gifting; it does not affect the lifetime exclusion. Thus, you would be able to change the beneficiary without having to deal with gift taxes as long as there is less than $75K gifted to each beneficiary.

In the past, a 529 plan owned by a grandparent, uncle, cousin, ..., or non-custodial parent was not reported as an asset on the FAFSA. Instead, distributions from a 529 plan owned by a non-custodial parent have counted as untaxed income to the beneficiary. That is, the distributions would possibly affect financial aid after the first year.

OTOH, the FAFSA rules regarding 529 plans are up for revision in 2021, but BH forum restricts discussing pending changes on any subject.
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Re: Implications of Flexible 529 Beneficiary Designations

Post by bogcir »

RetiredCSProf wrote: Sun May 16, 2021 8:23 pm Thus, you would be able to change the beneficiary without having to deal with gift taxes as long as there is less than $75K gifted to each beneficiary.
If you change the beneficiary from yourself to your children, it is considered a gift by the irs. You can only change beneficiaries to others in the same generation or above. If you start with a niece or nephew, you can later change to your children without issue.

So from you to your child would potentially eat away at your lifetime exemption.

What’s vague is who the gift is considered from if you do switch from your child to your grandchild. This article claims that in this situation it would be a gift from your child. In which case, you would be burning their lifetime exemption for them, which seems wrong: ... ings-plans
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