Transferring 529 College Plan

[myrdale]

My mother (70) has a 529 plan for my niece (10) and nephew (12). The values are something like $10k and $20k. She told me she wants to "transfer the plans to my sister". I'm not convinced this is the right thing to do.

My sister is not going to use the money to buy a car, or take a vacation. And I do believe some form of higher education is in both my niece's and nephew's future.

In 10 year's she'll be 80 and the nephew will finishing up college if he goes. If he doesn't that money will be rolled over to my niece. And if she doesn't, even at 82 I think that would still be a nice nest egg for my mother for her future expenses.

Is there any reason for her to consider doing the transfer while my mother is alive and well?

Are there reasons why this is a really bad idea? Taxes?

[disneysteve]

Why does your mother want to transfer ownership to your sister?

[kork13]

Depending on the state it's registered with, the 529 may not be able to transfer ownership except upon the current owner's death. State laws vary.

The dollar figures here are fairly small, and if the 529s go unused by either child, any 'cushion' that it could serve for your mother would be pretty minimal ... especially considering the taxes & penalties that the money would be subject to if she just withdraws it for her own use. Frankly, I think that would be somewhat a waste of your mother's intended generosity. I'd sooner suggest that if unused, the 529s get funneled into Roth IRAs for each child to kickstart their future security.

But it also sounds like at least one of them will be college/higher-ed bound -- note that 529s can be used for college/community college, trade schools, and other similar job training or academic programs. They've really become fairly flexible. And with such small dollar amounts, it sounds like a very small chance that the money will go unused. Thus, there's really no harm in your mother handing off control of the accounts, particularly if it'll make it simpler for your sister to use when the time comes.

[myrdale]

Why does your mother want to transfer ownership to your sister?

Her explanation was that she "is getting older".

[Randomsaver]

I'm curious about this as well. I think she should transfer it and trust the sister. Plus, isn't the safety net is that the distribution must be evidenced with college tuition receipts and other qualified-only items?

[disneysteve]

Her explanation was that she "is getting older".

So make sure the beneficiary is the child or that the accounts are left to them in her will.

[kork13]

I don't recall exactly .... is there some kind of difference in how 529 funds are treated (with regard to student aid) depending on who owns it? I know it matters alot between parent vs. child ... But is there a difference between parent vs. grandparent vs. random other person? Something along these lines keeps sticking in my mind, but I can't recall or find what I'm thinking about....

[Like2Plan]

Yes- there is a difference in the way it is counted when applying for financial aid (unless they’ve changed the rules)
FAFSA counted the $$ only after it was used if the grandparent (or a non-parent) was the 529 owner. FAFSA does a 2 year look back, so the strategy has been to use the grandparent’s 529 funding for the last 1 or 2 years of college so as not to count against financial aid.
This might be a good reason to make someone other than your sister the new account owner. (Although- as Kork said, check the state plan your Mom participates in to see under which circumstances the account owner can be changed.)
I was allowed to change account ownership on a 529 I had set up for a niece. She used it to go to college for a year, but then decided college was not for her. I changed ownership over to her at that point (she became owner and beneficiary). She then had the option to pull it out (and pay taxes plus 10% penalties on the gain) or use it for some other educational or vocational training pursuit in the future (which she eventually did do).