529 beneficiary

[InDebtInDC]

I want to open a 529 plan for my godchild. I read that if the parents are the accountholder, then the 529 plan is added to the family's net asset to determine federal Title IV financial aid.

I want to make myself the accountholder and designate the godchild as the beneficiary. I want to contribute my own money for her and not jeopardize her ability to get need-based aid and burden her parents.


Nothing I've read would prevent me from doing this, but before I contact the plan administrator to ask questions and register, would anyone please comment?

Any help would be greatly appreciated.

Link to 26 USC 529 for those interested: WAIS Document Retrieval

[Like2Plan]

InDebtInDC,
I think it is a great idea. The only hesitation that I have ever had about doing this revolved around the beneficiary electing not to attend college. If this happens and you end up cashing the account out as opposed to transferring it to another beneficiary, you would pay taxes on the earnings (and there is a penalty on the earnings). If you are in the 35% bracket by the time these events unfold, this might not be desirable. Check to see if your plan has any restrictions on transferring ownership. (I believe the beneficiary has 10 years after first becoming eligible to use the funds there are a couple of exceptions which allow this time frame to become extended).

If you would want your godchild to have the proceeds even if he/she did not attend college, you could transfer ownership over to him/her (assuming the plan would allow it) and he/she would pay taxes on the earnings. In this case, you just have to be concerned about triggering the gift tax limits--which is currently 12K (but may be adjusted higher as years go by).

[MonkeyMama]

Liek2plan - great points.

Yes, exactly. 529 plans are great because you can keep control of the assets and it doesn't count against the parents either, when it comes to financial aid.

I haven't opened up 529 plans for my kids though because I am wary about all the taxes/penalties if it does not get used for college.

Do you have other relatives/friends you can transfer it to if for some reason your godchild doesn't attend college (or say receives FULL scholarships?). You just never know.

We'll probably put a small amount in our kids 529s because we have 2 nieces and their parents are big on private school. We figure if any money does not get used we can make them the beneficiary (even have the parents reimburse us, though you are right, then there are gift tax ramifications).

But overall that is the point of 529s, so the gifter can retain control.

[InDebtInDC]

The only hesitation that I have ever had about doing this revolved around the beneficiary electing not to attend college. If this happens and you end up cashing the account out as opposed to transferring it to another beneficiary, you would pay taxes on the earnings (and there is a penalty on the earnings). If you are in the 35% bracket by the time these events unfold, this might not be desirable. Check to see if your plan has any restrictions on transferring ownership. (I believe the beneficiary has 10 years after first becoming eligible to use the funds there are a couple of exceptions which allow this time frame to become extended).

If this is the case, I would redesignate her father or herself as the accountholder, or redesignate a future sibling as the beneficiary.

I believe neither of these triggers gift taxes but I will check.

If you would want your godchild to have the proceeds even if he/she did not attend college, you could transfer ownership over to him/her (assuming the plan would allow it) and he/she would pay taxes on the earnings. In this case, you just have to be concerned about triggering the gift tax limits--which is currently 12K (but may be adjusted higher as years go by).

I will deal with that issue when the time comes because I think laws may change in 18 years.

Thanks for the comment.

[InDebtInDC]

Liek2plan - great points.

I haven't opened up 529 plans for my kids though because I am wary about all the taxes/penalties if it does not get used for college.

Do you have other relatives/friends you can transfer it to if for some reason your godchild doesn't attend college (or say receives FULL scholarships?). You just never know.

Based on everything I've read so far, if you redesignate the beneficiary as someone else in the same family as the previous beneficiary you trigger no tax implications.

If all else fails, I can always redesignate myself as the beneficiary, pay the transfer penalty, and withdraw to put myself through school.

[MonkeyMama]

You are right on designating beneficiaries. But if no one uses it for college, that is where the problem lies.

You can even make yourself the beneficiary with no tax implications. It just needs to be used for school is all. (My understanding anyway).

The tax/penalty implications are when you withdraw (or the beneficiary withdraws) and it is not used for school.

If you are confident it will get used for school, that someone can use it for school, then it sounds like a good plan. & a very nice gift.

[InDebtInDC]

I am 100% confident that they will be college educated. If not then I will make it happen

[MaksimFA]

The account holder can change hte beneficiary at any point in time. So if your godchild doesnt go to college, you can change it to yourself, your own children or whomever you want. You can yourself use it if you want to go back to school. Different state plans have different guidelines as to how to use it. See if your state has an instate deducation for the contributions, if not, then you can go with whatever state plan you want. let me know if you have any other questions.

[InDebtInDC]

I read that I as the accountholder would get some sort of penalty if I redesignate a beneficiary not in the immediate family of the last beneficiary.

Is this true?

Thanks for the help.

[MaksimFA]

With the plans I work with, there are none. What state plan are you working with? You can always call up the fund family sponsoring the 529 and ask.

[Like2Plan]

I read that I as the accountholder would get some sort of penalty if I redesignate a beneficiary not in the immediate family of the last beneficiary.

Is this true?

Thanks for the help.

InDebtInDC,
I believe you are correct on this. There is guidance on the IRS web site on rules for 529's.
Here is the list of folks that the IRS defines that you can change the beneficiary to:


Members of the beneficiary's family. For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.

1. Son, daughter, stepchild, foster child, or a descendant of any of them.
2. Brother, sister, stepbrother, or stepsister.
3. Father or mother or ancestor of either.
4. Stepfather or stepmother.
5. Son or daughter of a brother or sister.
6. Brother or sister of father or mother.
7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
8. The spouse of any individual listed above.
9. First cousin.

link to IRS guidance on Qualified Tuition Program (QTP)