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End-of-Year 529 Timing

Plus, changing beneficiaries, non-citizen contributions, and Crummey questions.

Susan T. Bart, 03/26/2010

College-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters. E-mail your questions to advisorquest@morningstar.com.

Question: In 2009, I made two gifts, one for each child of mine, before year end through electronic payment into their 529 accounts. The cash was taken out of my checking account on Dec. 29, 2009, but the transfer was not credited to the 529 accounts until 2010. Is this a 2009 gift? Does it matter?
Susan: The gift is complete when you no longer have the ability to take it back. So if your account was debited in 2009 for an electronic transfer, it's a 2009 gift even if it doesn't get credited to the 529 program until 2010. The significance of the timing of the gift is in determining how much in additional funds you can give your children or their 529 accounts in 2010 without exceeding the $13,000 per donee gift tax annual exclusion.

Question: My client opened a 529 account naming himself as the beneficiary many years ago. He is the account owner as well as the designated beneficiary. He was planning to go back to school but ultimately did not pursue it. There is still $33,000 in his 529 account. He wants to change the beneficiary from himself to a son of his sister, in order words, his nephew. If he changes the beneficiary on the account to his nephew, will this trigger a gift tax or cause him to have to file a gift tax return?
Susan: Your client's nephew is a member of the family and thus the change of beneficiary will not be treated as a nonqualified distribution that is subject to income tax. There are, however, gift tax consequences to the change of beneficiary. The change of beneficiary will be treated as a gift from your client to the nephew. Your client would be required to file a gift tax return (Form 709). If your client does not make the five-year election, then only $13,000 of the gift will be covered by the gift tax annual exclusion, and $20,000 of the gift will be treated as a taxable gift from your client to his nephew. The $20,000 taxable gift would either reduce your client's $1,000,000 aggregate lifetime exclusion or if your client has already used his full $1,000,000 lifetime exclusion, would be subject to gift tax.

Because your client needs to file a gift tax return in any event, your client might as well make the five-year election on his gift tax return to cause the gift to be treated as if it were made pro rata over five years. Thus your client would be treated as if he made a gift of $6,600 in the year the beneficiary was changed and each of the subsequent four years. Assuming that your client did not make other gifts to his nephew in excess of $6,400 ($13,000 minus $6,600) in any of these years, no gift tax would be due.

If your client is highly motivated to avoid filing a gift tax return, he could change the beneficiary over $13,000 of the account this year, change the beneficiary over an additional $13,000 of the account next year, and then change the beneficiary of the remainder of the account in 2013. Assuming that in any year his gifts to his nephew plus the amount of the 529 account over which he changes the beneficiary does not exceed the gift tax annual exclusion amount, he would not have to file a gift tax return reporting the gift.

Question: A 529 account is being established for a minor child of a deceased employee of a global corporation so that co-workers of the deceased employee can make contributions to the account. Can a nonresident alien or a U.S. citizen residing abroad make contributions to the 529 account?
Susan: If contributions from multiple donors are anticipated, the 529 account should be established under a program that permits non-account owners to make contributions. Assuming that this is the case, generally there is no prohibition against a nonresident alien or a U.S. citizen residing abroad making contributions to the 529 account of which someone else is the account owner.

Question: Are you aware of any prohibitions on the creator of a Crummey trust being a married couple establishing a Crummey trust for their grandchild with their son as the trustee? All trust forms that I have come across refer to an individual, not a couple, establishing the trust.
Susan: It's customary to name a single individual as the grantor of a trust, but there is no legal prohibition on a married couple being named as the grantor. For gift and estate tax purposes, what is relevant is who makes contributions to the trust, not who is named as grantor in the trust document. However, assuming that only one of the married couple is named as grantor, typically there would be no prohibition on the other member of the couple making contributions to the trust.

To comply with certain Treasury regulations, we state that (i) this article is written to support the promotion and marketing of the transactions or matters addressed herein, (ii) this article is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (iii) each taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

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