Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have created two Section 529 accounts—one for each of my children.  My father wants to make a contribution of $13,000 to each of those accounts this year.  What are the gift tax consequences of the transfer?

Answer: Contributions to a Section 529 account are treated as present interest gifts with respect to the beneficiaries of the account.  Therefore, in this example, the grandfather will be making gifts that qualify for the annual gift tax exclusion with respect to each of the beneficiaries—his grandchildren.

The IRS has not said yet whether the gifts are also to be treated as gifts made to the Section 529 account owner.  The account owner has the ability to take distributions from the Section 529 account and use the money for his or her own benefit.  Using normal gift tax analysis, one would expect the grandfather’s gifts to the account to be treated as gifts to the client as well.

However, it seems unfair that a transfer to a Section 529 account would be treated as a taxable gift to both the account beneficiaries and the account owner.

The bottom line is that in this example we don’t the gift tax consequences between the grandfather and the taxpayer.

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