Taxation & Estate Planning

New Proposed Regulations for 529 Plans

By Michael D. Bonasera, Esq.

Thanks to Greg Herman-Giddens of the North Carolina Estate Planning Blog for his link to the IRS’ new proposed regs governing 529 College Savings Plans. The new regs will include:

1. an anti-abuse rule (to prevent using 529 Plans to skirt gift tax rules);

2. determine the estate, gift and GST tax results of contributions, transfers and withdrawals; and,

3. create rules for making the 5 year election, address certain income tax issues, and create new record keeping requirements.

Here’s the example the IRS gives as an abuse - quite a clever technique!:

Grandparents want to gift $1 million to a child without using any of their $1 million lifetime exclusion. So, the grandparents establish 529 Plan accounts for each of their 10 grandchildren, placing $120,000 in each (the $12,000 annual exclusion, times 2 for 2 grandparents, times 5 to use the 5 year averaging rule) times the number of grandchildren, and naming the child as the account owner. After the 5 years, the child designates a new beneficiary for each account, naming himself. Since Section 529 provides that no gift occurs if the new beneficiary is in the same family and at the same or a higher generational level, the grandparents have succeeded in giving the child $1.2 million without using any of their applicable exclusion.

The child would have to pay income tax and a penalty on any growth when withdrawals are used for non-educational expenses, but overall it would save the family a lot of tax.

Full post as published by The Ohio Trust & Estate Blog on March 02, 2008 (boomark / email).