Change 529 beneficiary to child

[tax-novice2]

I have a 529 plan with myself as the beneficiary. If I change the beneficiary to my child what are the tax implications? Is it considered a gift? Are there any tax forms I need to file?

[NCperson]

@tax-novice2 - there are no tax consequences.. You are the owner of the 529 plan (which gives you the right to change the beneficiary) and changing the benficiary doesn't change the ownership; you still own it.  

[tax-novice2]

But why would anyone create a 529 plan with the child as the beneficiary. Isn't it always better to create it in one's own name and then change beneficiary to the child when the time comes to pay for the child's college?

[SusanY1]

Yes, a change of beneficiary on a 529 plan account from a parent to a child is considered a gift. 

While there aren't any income tax consequences to a beneficiary change on a 529 College Savings plan, there are potential gift tax consequences when the transfer is to a family member in a younger generation, as in this example.  Transfers between siblings (or first cousins when grandparents own the plan) do not trigger gift tax.  However, a transfer from a parent to a child does constitute a taxable gift if the value of the account at the time of the transfer is greater than the annual exclusion amount. 

The drawback in the parent being the beneficiary until a child's college education begins is that while the contribution(s) may not be above the annual exclusion amount, the funds could later appreciate to a level that could be above the exclusion amount and trigger a gift tax return filing requirement.  

 

[Hal_Al · Accepted solution]

Q. But why would anyone create a 529 plan with the child as the beneficiary. Isn't it always better to create it in one's own name and then change beneficiary to the child when the time comes to pay for the child's college?

A. No.

As @SusanY1 said, the funds could later appreciate to a level that could be above the exclusion amount and trigger a gift tax return filing requirement.  

In addition, you are allowed an annual (every year) gift tax exclusion for contributing to a child beneficiary's 529.  There is also a special exception to the annual exclusion that applies to 529 college savings plans that allows you to front-load contributions without exceeding the limit.  This strategy allows taxpayers to make a lump sum contribution to a 529 plan of up to five times the annual gift tax exclusion, if the contribution is treated as if it were spread over a five year period. That means you can contribute up to $80,000 to a 529 plan ($160,000 if married giving jointly) in a single year and not have to file a gift tax return. 

[tax-novice2]

Thanks. What are the tax implications if a 529 account with the parent as the beneficiary is inherited after death. Can it be bequeathed to a grandchild instead of their children? Does the inheritor become the owner of that 529 plan as well as the beneficiary? Are there any limitations to how long the 529 can stay as a 529 before being used for educational purposes?

[SusanY1]

At the death of the owner, the account will be given to the named "successor owner" which is not necessarily the same person as the beneficiary, though it can be.  In the absent of a successor owner the plan rules and state law will govern the transfer of the asset.  However, the transfer of the assets to the 529 plan account is considered a completed gift and is, therefore, not includible in the gross federal estate of the contributor or owner.  If, however, the donor uses the 5-year rule for a lump sum gift and dies before the end of the 5-year period, part of the gift may be includible in the gross estate of the donor.  

The successor owner would then have control over the account including the ability to change the beneficiary.  The change of the successor owner itself doesn't trigger a gift.  In 529 plans only the change of a beneficiary does triggers a new gift or taxable/reportable transfer.

There is no requirement to distribute the funds from a 529 plan within a certain time period under federal rules (like there are for Coverdell Education Savings Accounts), but changes in beneficiaries must be in the same generation to avoid triggering a new taxable/reportable gift.    

It is possible for  beneficiary changes to a relative in a younger generation to also trigger the Generation Skipping Transfer Tax.  See more about that here: What is the Generation Skipping Transfer Tax?