Plus, a plan provider gives account owner incorrect advice about gifting rules.
Every month, college-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters. The purpose of this column is to provide general educational information for investment professionals. Susan cannot give advice regarding specific clients or actual matters. Thus, only hypothetical questions, seeking general information, can be answered. E-mail your questions to firstname.lastname@example.org.
Q. I have a question about your February column regarding UTMA accounts and 529 plans. Currently, UTMA 529 plans are considered assets of the child for financial aid purposes. I have read that under the Deficit Reduction Act of 2005, UTMA 529 accounts will be considered assets of the parent beginning July 1. Is this accurate?
Susan: The Deficit Reduction Act of 2005 was intended to treat prepaid tuition plans in the same manner as 529 savings accounts for financial aid purposes. Whether or not it will also result in custodial 529 savings account being treated in the same manner as noncustodial 529 savings accounts remains to be seen.
The Deficit Reduction Act of 2005 provides that a "qualified education benefit shall not be considered an asset of a student for purposes of section 475." A "qualified education benefit" is defined as a qualified tuition program (as defined in section 529(b)(1)(A) of the Internal Revenue Code), another prepaid tuition plan offered by a state, or a Coverdell education savings account. The act says nothing explicitly about custodial 529 savings accounts.
I agree that read literally the act prohibits any 529 savings account from being treated as an asset of the beneficiary, regardless of who is the account owner and regardless of whether it is a custodial account. But did Congress really intend to go this far? If an 18-year-old with $300,000 in a savings account transfers it to a 529 savings account immediately before applying to college, did Congress intend for all of those funds to be ignored for financial aid purposes? Therefore, I think it possible that a technical correction will be made to the statute, or the statute will be construed in a manner, that ignores the 529 funds only if the funds were contributed by someone other than the beneficiary. Under this construction, UTMA funds might be treated as contributed by the beneficiary, because they are funds that legally belong to the beneficiary.
Another indication that the provision in the Deficit Reduction Act of 2005 was not well thought out is the fact that the statute does not specify whether the assets will be considered as assets of some other person, such as the account owner in the case of a 529 savings account, for financial aid purposes.
Q. I have a question regarding gifting and 529 accounts. One of my clients has a 529 account for his children. A parent is the owner and his children are beneficiaries of each account. A grandparent has been gifting funds to the children directly to the 529. American Funds, the provider of the plan, said these contributions qualify as gifts to the minor, and it is not necessary to title the 529 account as a UTMA. I have verified this with them two more times. They did tell me on one of these calls that the parent (owner) cannot take the money back without violating gifting rules despite not being a UTMA, but they said changing the beneficiary at any point to the other child would be construed as a gift from the current beneficiary to the new beneficiary. Does all of this sound correct?
Susan: Code Section 529(c)(2) states that "any contribution to a qualified tuition program on behalf of any designated beneficiary . . . shall be treated as a completed gift to such beneficiary which is not a future interest in property." There is no requirement that the donor be the account owner. Nor is it necessary to title the account as a Uniform Transfers to Minors Act account in order for the contribution to be treated as a gift to the beneficiary.