2 Comma Coverdell, What would you do?

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veggivet
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2 Comma Coverdell, What would you do?

Post by veggivet »

Long story short, I opened a Coverdell and a 529 when my daughter was born, 29 years ago. By the time she was 15, I had saved enough in her 529 to cover her college costs, so I figured I would take a flyer on buying an individual stock in her Coverdell. Fast forward 14 years, Coverdell now worth 1 mil. and the stock comprises 91% of the account. She has no plans to return to school for an advanced degree, and has no kids at this point. The account needs to be closed or transferred before she turns 30.

Option 1: Transfer into her 529, after selling all holdings.
Option 2: Give her a nice 30th birthday present, with the understanding that she will need to pay taxes on the CG and that a 10% penalty will be incurred.
Option 3: Transfer to a cousin who is 5 years younger with the understanding that if my daughter has any children before cousin turns 30, the account will be transferred to her child.

I am aware of all the risks involved with having an extremely non-diversified portfolio in this account, so no need to expound on systemic, non-systemic, company specific, or any other risk that I forgot to mention. :wink:

I am leaning toward Option 3, but am unsure if taxes will apply if the account is eventually transferred to her child.

Thanks to all in advance... :happy
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vanbogle59
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Re: 2 Comma Coverdell, What would you do?

Post by vanbogle59 »

veggivet wrote: Fri Nov 19, 2021 8:04 am I am aware of all the risks involved with having an extremely non-diversified portfolio
LOL. It's only "risk" when it goes south.
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exodusNH
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Re: 2 Comma Coverdell, What would you do?

Post by exodusNH »

veggivet wrote: Fri Nov 19, 2021 8:04 am Long story short, I opened a Coverdell and a 529 when my daughter was born, 29 years ago. By the time she was 15, I had saved enough in her 529 to cover her college costs, so I figured I would take a flyer on buying an individual stock in her Coverdell. Fast forward 14 years, Coverdell now worth 1 mil. and the stock comprises 91% of the account. She has no plans to return to school for an advanced degree, and has no kids at this point. The account needs to be closed or transferred before she turns 30.

Option 1: Transfer into her 529, after selling all holdings.
Option 2: Give her a nice 30th birthday present, with the understanding that she will need to pay taxes on the CG and that a 10% penalty will be incurred.
Option 3: Transfer to a cousin who is 5 years younger with the understanding that if my daughter has any children before cousin turns 30, the account will be transferred to her child.

I am aware of all the risks involved with having an extremely non-diversified portfolio in this account, so no need to expound on systemic, non-systemic, company specific, or any other risk that I forgot to mention. :wink:

I am leaning toward Option 3, but am unsure if taxes will apply if the account is eventually transferred to her child.

Thanks to all in advance... :happy
I think option 3 could cause family strife. What if the cousin doesn't want to give it back? People do strange things with money.

If it's legal, I'd split it. Give your daughter whatever amount you want and the the balance to the cousin, unconditionally.

I would give your daughter the option of having it transferred to the 529 or simply cashed out, depending on her tax / income situation.
livesoft
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Re: 2 Comma Coverdell, What would you do?

Post by livesoft »

Why not do some of each of them and anything else you can think of? I don't think you have to pick just one of those 3 when you can pick all of them.
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Jags4186
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Re: 2 Comma Coverdell, What would you do?

Post by Jags4186 »

Does transfer mean change beneficiary? Or do you actually mean give it to the cousin? If the 2nd, I'd never do that. The cousin could very easily say no when the time comes to return it.
260chrisb
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Re: 2 Comma Coverdell, What would you do?

Post by 260chrisb »

veggivet wrote: Fri Nov 19, 2021 8:04 am Long story short, I opened a Coverdell and a 529 when my daughter was born, 29 years ago. By the time she was 15, I had saved enough in her 529 to cover her college costs, so I figured I would take a flyer on buying an individual stock in her Coverdell. Fast forward 14 years, Coverdell now worth 1 mil. and the stock comprises 91% of the account. She has no plans to return to school for an advanced degree, and has no kids at this point. The account needs to be closed or transferred before she turns 30.

Option 1: Transfer into her 529, after selling all holdings.
Option 2: Give her a nice 30th birthday present, with the understanding that she will need to pay taxes on the CG and that a 10% penalty will be incurred.
Option 3: Transfer to a cousin who is 5 years younger with the understanding that if my daughter has any children before cousin turns 30, the account will be transferred to her child.

I am aware of all the risks involved with having an extremely non-diversified portfolio in this account, so no need to expound on systemic, non-systemic, company specific, or any other risk that I forgot to mention. :wink:

I am leaning toward Option 3, but am unsure if taxes will apply if the account is eventually transferred to her child.

Thanks to all in advance... :happy
Wow, interesting problem to have. I'm looking forward to the replies. Not knowing the ramifications of transferring or requirements to avoid the penalty it seems to me option 2 is what I would do. I'd certainly do everything I could to avoid the penalty but selling it and paying the CG isn't the worse thing that will ever happen to you and it would set her up pretty well for retirement and life in general. In a well diversified portfolio of course....sorry.... :D :D :D
dukeblue219
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Re: 2 Comma Coverdell, What would you do?

Post by dukeblue219 »

#3 is a terrible idea, personally. Giving family money with strings attached never works well.

A nice thing to do would be give the cousin a portion, though, if you are so inclined and feel everyone would be happy with it. Just don't make it conditional on anything.
Mako
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Re: 2 Comma Coverdell, What would you do?

Post by Mako »

3 seems kinda weird to me unless you view the cousin as basically another child. But I don't know your family dynamic, maybe I'm just not that close to my cousins, or maybe a million isn't a lot to your family...it doesn't sound like cousin even has any plans where they'd use it.

Also, does daughter know about this money? It is easy to know in your head "This is not my money and I have no entitlement to it." I think it's also easy to think in your head "Man, I have bills to pay, a mortgage, and dad saved a million dollars specifically for me but then gave it to someone else." This could hurt your relationship, right or wrong. Again you know your family better than us, but like someone said above money does things to people.
randomguy
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Re: 2 Comma Coverdell, What would you do?

Post by randomguy »

With 3, I would worry about something like you dying and what happens to the account. How do you feel about giving your cousin a million bucks? 1 seems easiest if you are willing to give up stock picking....

I might also think about splitting the difference where do you do something like 500k for a 529 for future kids, 300k to your daughter as an early inheritence, and 200k to keep for another 5 years in the coverdell.
randomguy
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Re: 2 Comma Coverdell, What would you do?

Post by randomguy »

dukeblue219 wrote: Fri Nov 19, 2021 8:18 am #3 is a terrible idea, personally. Giving family money with strings attached never works well.

A nice thing to do would be give the cousin a portion, though, if you are so inclined and feel everyone would be happy with it. Just don't make it conditional on anything.
You aren't really giving the money to the other family member. You are making them the beneficiary but the OP will contain control. Given that they are 5s younger, I am not sure if they are in school. I guess you could use the money to pay off loans. I assume the end game here is that in 5 years, you transfer all the money to a 529 and make the daughter a beneficiary again.
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veggivet
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Re: 2 Comma Coverdell, What would you do?

Post by veggivet »

Thanks to all for your thoughtful and incisive comments. I didn't really want to get into family dynamics, but they are relevant to this situation. Daughter is fully aware of all of her investments, and is very thankful and grateful to be in the position she is in. And yes, her retirement and taxable accounts are well diversified. :happy

Cousin may go to law school, and daughter is fine with covering that cost for him from either her 529 or Coverdell. Cousin would not be privy to who is paying for law school, only that 'it is all taken care of'. Cousin would also not be aware if he is made beneficiary of Coverdell. My sister would, of course. If I die in the interim 5 year period, my sister would know that my wishes were to have the account go back to my daughter if she has a child.

Splitting things up is another option I didn't consider. I tend to be an all or nothing type, but this approach could certainly work.
daheld
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Re: 2 Comma Coverdell, What would you do?

Post by daheld »

veggivet wrote: Fri Nov 19, 2021 8:56 am Thanks to all for your thoughtful and incisive comments. I didn't really want to get into family dynamics, but they are relevant to this situation. Daughter is fully aware of all of her investments, and is very thankful and grateful to be in the position she is in. And yes, her retirement and taxable accounts are well diversified. :happy

Cousin may go to law school, and daughter is fine with covering that cost for him from either her 529 or Coverdell. Cousin would not be privy to who is paying for law school, only that 'it is all taken care of'. Cousin would also not be aware if he is made beneficiary of Coverdell. My sister would, of course. If I die in the interim 5 year period, my sister would know that my wishes were to have the account go back to my daughter if she has a child.

Splitting things up is another option I didn't consider. I tend to be an all or nothing type, but this approach could certainly work.
For me anyway, the details of the family dynamics make option number 3 a worse idea, not a better one.
exodusNH
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Re: 2 Comma Coverdell, What would you do?

Post by exodusNH »

veggivet wrote: Fri Nov 19, 2021 8:56 am Thanks to all for your thoughtful and incisive comments. I didn't really want to get into family dynamics, but they are relevant to this situation. Daughter is fully aware of all of her investments, and is very thankful and grateful to be in the position she is in. And yes, her retirement and taxable accounts are well diversified. :happy

Cousin may go to law school, and daughter is fine with covering that cost for him from either her 529 or Coverdell. Cousin would not be privy to who is paying for law school, only that 'it is all taken care of'. Cousin would also not be aware if he is made beneficiary of Coverdell. My sister would, of course. If I die in the interim 5 year period, my sister would know that my wishes were to have the account go back to my daughter if she has a child.

Splitting things up is another option I didn't consider. I tend to be an all or nothing type, but this approach could certainly work.
People get really weird about money.

I think splitting it up and giving it unconditionally would be the best idea. This way there is absolutely no possibility of any sort of family strife -- even if you find that unfathomable.

There would certainly be nothing wrong with your daughter subsequently gifting funds to her cousin if his split turned out not to be enough.

People have a misunderstanding of the "gift tax" when the annual gift exceeds $15k. It's only relevant if you wind up dying with an estate currently at just over $11 million. (Well, federally, anyway. Some states impose their own.)
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veggivet
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Re: 2 Comma Coverdell, What would you do?

Post by veggivet »

exodusNH wrote: Fri Nov 19, 2021 9:15 am
People have a misunderstanding of the "gift tax" when the annual gift exceeds $15k. It's only relevant if you wind up dying with an estate currently at just over $11 million. (Well, federally, anyway. Some states impose their own.)
Thanks, exodusNH, I'm clear on the gift tax implications, but I've received conflicting advice on whether or not generation-skipping taxes would be due if the Coverdell eventually ends up with my daughter's child as beneficiary.
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Wiggums
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Re: 2 Comma Coverdell, What would you do?

Post by Wiggums »

veggivet wrote: Fri Nov 19, 2021 9:21 am
exodusNH wrote: Fri Nov 19, 2021 9:15 am
People have a misunderstanding of the "gift tax" when the annual gift exceeds $15k. It's only relevant if you wind up dying with an estate currently at just over $11 million. (Well, federally, anyway. Some states impose their own.)
Thanks, exodusNH, I'm clear on the gift tax implications, but I've received conflicting advice on whether or not generation-skipping taxes would be due if the Coverdell eventually ends up with my daughter's child as beneficiary.
This article might answer your question about generational skipping

https://www.savingforcollege.com/articl ... tributions
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aristotelian
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Re: 2 Comma Coverdell, What would you do?

Post by aristotelian »

I don't see a good tax efficient option. I'd just withdraw and take the hit. You will lose some of those gains to tax but otherwise that is a great problem to have. You'll get a smaller distribution but so much more flexibility. Full disclosure, I am more familiar with 529 than Coverdell.
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veggivet
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Re: 2 Comma Coverdell, What would you do?

Post by veggivet »

Wiggums wrote: Fri Nov 19, 2021 9:42 am
This article might answer your question about generational skipping

https://www.savingforcollege.com/articl ... tributions
Thanks for the link, Wiggums. Assuming the same holds true for Coverdells, (and I'm pretty sure it does), the GST would not apply here since we're way under the 11.75 mil threshold.
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veggivet
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Re: 2 Comma Coverdell, What would you do?

Post by veggivet »

aristotelian wrote: Fri Nov 19, 2021 9:53 am I don't see a good tax efficient option. I'd just withdraw and take the hit. You will lose some of those gains to tax but otherwise that is a great problem to have. You'll get a smaller distribution but so much more flexibility. Full disclosure, I am more familiar with 529 than Coverdell.
Agreed, I don't see a tax efficient option either. Like you said, a good problem to have, and I don't think my daughter would have any issues owing tax on the CG or the penalty.
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Re: 2 Comma Coverdell, What would you do?

Post by aristotelian »

veggivet wrote: Fri Nov 19, 2021 10:05 am
aristotelian wrote: Fri Nov 19, 2021 9:53 am I don't see a good tax efficient option. I'd just withdraw and take the hit. You will lose some of those gains to tax but otherwise that is a great problem to have. You'll get a smaller distribution but so much more flexibility. Full disclosure, I am more familiar with 529 than Coverdell.
Agreed, I don't see a tax efficient option either. Like you said, a good problem to have, and I don't think my daughter would have any issues owing tax on the CG or the penalty.
I was under the impression you would pay the tax, not her. Is that incorrect?
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veggivet
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Re: 2 Comma Coverdell, What would you do?

Post by veggivet »

The tax and penalty would be paid from the account, which is officially owned by me, but I consider it 'her' account.
aristotelian
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Re: 2 Comma Coverdell, What would you do?

Post by aristotelian »

veggivet wrote: Fri Nov 19, 2021 10:47 am The tax and penalty would be paid from the account, which is officially owned by me, but I consider it 'her' account.
If it's like 529, you will just get a distribution check and you will pay the taxes. Of course you will get the distribution check and would be free to set a portion aside to help cover your taxes.
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Re: 2 Comma Coverdell, What would you do?

Post by Grt2bOutdoors »

Spend some money and consult an estate/trust attorney if considering option 3. My understanding is if you are the "owner", the estate becomes the owner of the assets if you die. What does your will or trust say about distribution of assets? That is what will determine who gets what.
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veggivet
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Re: 2 Comma Coverdell, What would you do?

Post by veggivet »

After some thought and discussions, I've decided that I will sell all securities and transfer entire balance into the already open 529 accounts about a month before my daughter turns 30. My CPA says this would not a taxable event, and since there is no age limit on the 529 side, the funds can eventually be transferred to children in the next generation. Thanks very much to all who contributed their opinion; truly appreciated. :thumbsup
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Re: 2 Comma Coverdell, What would you do?

Post by Makefile »

veggivet wrote: Sun Dec 05, 2021 11:47 am After some thought and discussions, I've decided that I will sell all securities and transfer entire balance into the already open 529 accounts about a month before my daughter turns 30. My CPA says this would not a taxable event, and since there is no age limit on the 529 side, the funds can eventually be transferred to children in the next generation. Thanks very much to all who contributed their opinion; truly appreciated. :thumbsup
Nice. Sure to cause a double-take by the employees at the 529 plan when they process the transfer.
123
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Re: 2 Comma Coverdell, What would you do?

Post by 123 »

Transferring a $1 million Coverdell into a 529 only kicks the tax can down the road. Yes having a large 529 is good because they can also be used to pay for some pre-college educational expenses as well. But $1 million is a lot, unless there are a number of children available to benefit from it relatively soon. It doesn't sound like it.

I would recommend consideration of someone taking some of the tax hit and getting some of those funds (you have plenty) out of the Coverdell/529 umbrella into a regular taxable account. In a regular taxable account you get the advantage of potential long term capital gains tax treatment and a basis steo-up at death.

I would suggest at least half of the account balance should be freed of the Coverdell/529 use and taxation constraints. $500K is still a healthy size for a 529.

I would not delay on moving funds to 529 accounts if that's part of your plan. Waiting until the last minute/month can be a recipe for problems if issues/developments preclude correct and timely transaction execution.
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veggivet
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Re: 2 Comma Coverdell, What would you do?

Post by veggivet »

123 wrote: Sun Dec 05, 2021 1:40 pm Transferring a $1 million Coverdell into a 529 only kicks the tax can down the road. Yes having a large 529 is good because they can also be used to pay for some pre-college educational expenses as well. But $1 million is a lot, unless there are a number of children available to benefit from it relatively soon. It doesn't sound like it.

I would recommend consideration of someone taking some of the tax hit and getting some of those funds (you have plenty) out of the Coverdell/529 umbrella into a regular taxable account. In a regular taxable account you get the advantage of potential long term capital gains tax treatment and a basis steo-up at death.

I would suggest at least half of the account balance should be freed of the Coverdell/529 use and taxation constraints. $500K is still a healthy size for a 529.

I would not delay on moving funds to 529 accounts if that's part of your plan. Waiting until the last minute/month can be a recipe for problems if issues/developments preclude correct and timely transaction execution.
Kicking things down the road is fine by me; I won't be driving on it when tax time comes! :wink:

I won't take any chances on waiting until the last minute. Plan is to liquidate 10% of the individual stock monthly, and sell the remaining index funds November 1st. Those trades will clear 3 days later, leaving around 4 weeks to complete the transfer before her 30th birthday.
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Re: 2 Comma Coverdell, What would you do?

Post by MBB_Boy »

Is there a limit on how many times a 529 can be transferred downwards? If not, then this plan sort of acts as an education "trust", and it ETA: " almost" doesn't matter how large it grows to. If the grandkid doesn't use it all for private k-18+ college + grad school, then maybe the grand nieces/nephews do. And if THEY don't, then great grand kid, etc etc.

Great job by you in being able to (potentially) establish such a legacy, providing free or near free education for potentially generations.
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Re: 2 Comma Coverdell, What would you do?

Post by veggivet »

MBB_Boy wrote: Mon Dec 06, 2021 8:42 am Is there a limit on how many times a 529 can be transferred downwards? If not, then this plan sort of acts as an education "trust", and it ETA: " almost" doesn't matter how large it grows to. If the grandkid doesn't use it all for private k-18+ college + grad school, then maybe the grand nieces/nephews do. And if THEY don't, then great grand kid, etc etc.

Great job by you in being able to (potentially) establish such a legacy, providing free or near free education for potentially generations.
Thanks. I don't believe there is any limit as to how many times a 529 can be transferred downwards, but I think a 'generation skipping' tax may apply.
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