Discussion:Is 529 plan value an asset?

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Discussion Forum Index --> Basic Tax Questions --> Is 529 plan value an asset?


Discussion Forum Index --> Tax Questions --> Is 529 plan value an asset?

Taxking00 (talk|edits) said:

11 August 2009
Have a client that is trying to determine if they are insolvent. CLient has 529 plans for both kids, and being that the parents "own" the plan and the kids are the beneficiaries should we include the value of the 529 plans when trying figuring insolvancy?

Bd cpa (talk|edits) said:

11 August 2009
Pub 4681 states "For purposes of determining insolvency, assets include the value of everything you own." In addition, the insolvency worksheet contained in the same Pub has a line item 32. "Interest in education accounts."

JR1 (talk|edits) said:

August 11, 2009
I would defer to bankruptcy/tax attorney folks, but I disagree. The 529 is a TRUST, which means that the client does NOT own those assets. The trust does. Now a 529 isn't an irrevocable trust, which may kick it back. I do know that it is NOT counted for estate tax purposes tho'.

Blrgcpa (talk|edits) said:

11 August 2009
I think that you need an atty.

CrowJD (talk|edits) said:

11 August 2009
For what purpose are they trying to determine if they are insolvent? Why do they need to know this?

Bd cpa, interest means a property interest. I hope you would not be including the value of a trust on a trustee's personal financial statement without reading over the trust carefully, or seeking a legal opinion if necessary.

The point I'm trying to make is that you need to know why the insolvency determination is being made. How does Pub. 4681 come into play with this?

{JR, I think the reason it's not inlcuded in the gross estate is that when they die, they can no longer revoke the trust, and hence it's irrevocably the child's for education}.

Bm911tax (talk|edits) said:

11 August 2009
In most cases 529 Plan is not a trust but a custodial account, although the assets of 529 plan can be transferred to RLT as long as RLT maintains the same provisions of the 529 plan inside the trust.

Based on my reading of IRS PLR 199932013 and PLR 199935002 the 529 plan assets should be included. http://www.unclefed.com/ForTaxProfs/irs-wd/1999/9932013.pdf http://www.unclefed.com/ForTaxProfs/irs-wd/1999/9935002.pdf A parent has full control of the 529 plan funds and if withdrawn for non-qualified reasons just pay the tax and penalties.

Bd cpa (talk|edits) said:

14 August 2009
CrowJD, Pub 4681 involves cancellation of debt income which I assume is why Taxking00 is posting.

Ckenefick (talk|edits) said:

5 December 2011
Bump...DaveFogel - Do you have an opinion on this? If parent is the "custodian" of a child's 529 plan, would the 529 account balance figure in to the parent's insolvency calculation as a countable asset?

DaveFogel (talk|edits) said:

5 December 2011
Sec. 529(b) provides that the funds contributed to a 529 plan must be held in a qualified trust, the contributor can't direct how the funds are invested, and can't pledge the fund as security for a loan. In addition, Sec. 529(c)(2) treats those contributions as completed gifts to the beneficiary. Under those circumstances, I would not treat the funds in the 529 account as the contributor's asset in the insolvency calculation.

Ckenefick (talk|edits) said:

6 December 2011
My only concern is that, even though 529 contributions are treated as completed gifts, there are still strings attached (which is a unique aspect of 529 contributions when compared to other types of gifts). These strings basically permit the contributor/custodian to get the funds back if he wants to.

Given this, any more thoughts from Dave or anyone else?

Ckenefick (talk|edits) said:

7 December 2011
Bump.

Any thoughts on this? 529 accounts are significant in this case - About $300k worth. If the 529 assets don't factor into the insolvency calculation, taxpayer is very insolvent...and will be able to exclude about $250k of COD income under the insolvency exception.

Death&Taxes (talk|edits) said:

7 December 2011
"Account owner means the person who, under the terms of the QSTP or any contract setting forth the terms under which contributions may be made to an account for the benefit of a designated beneficiary, is entitled to select or change the designated beneficiary of an account, to designate any person other than the designated beneficiary to whom funds may be paid from the account, or to receive distributions from the account if no such other person is designated" Reg. 1.529-1

Seems like the donor is hedging his bet, yet I wonder how this squares with the requirements of Section 408(a)(5), which is a condition of Sec 529(b)(1).

"The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund."

I realize the assets are not 'grabbed' by the insolvency computation, but wouldn't their use in this computation do just that. I doubt a lending instituion would permit a borrower to list these trust assets when applying for a loan.

Ckenefick (talk|edits) said:

7 December 2011
Thanks D&T - So what is your conclusion?

Death&Taxes (talk|edits) said:

7 December 2011
"to receive distributions from the account if no such other person is designated." What are the mechanics that would lead to such a situation? Individual had 529 account with daughter as beneficiary, but she enters the Coast Guard at 18, so he now names son as beneficiary and son enters the Army after high school. His wife is dead, so he has no more potential beneficiaries. These events happened before the forgiveness of debt.

From somewhere I remember the age 30 for the beneficiary as being the defining moment when the assets have to be returned to him or distributed to the beneficiary......but insolvency is measured in the minute and is not based on being the sole heir of a wealthy aunt who is 93, and so it would seem it should not matter than the insolvent person has a potential windfall from an unused 529 plan.

I must admit that I can find no mention of that 30 age in the code, so perhaps it is a figment of my imagination.

DaveFogel (talk|edits) said:

7 December 2011
Many states have held that assets transferred to a 529 plan are exempt from creditors, but assets exempt from creditors may nonetheless be included in the insolvency calculation. See Carlson v. Commissioner, 116 T.C. 87 (2001).

I don't think that there's anything definitive to answer this question one way or another. All we can give is an opinion since neither the IRS nor the courts have addressed this issue.

Ckenefick (talk|edits) said:

7 December 2011
I don't think that there's anything definitive to answer this question one way or another.

I think this is the answer (unfortunately).

Do you think it would help if client/custodian relinquishes his custodianship - and say, names a trusted relative as custodian?

Death&Taxes (talk|edits) said:

7 December 2011
Or could the OP's client convert these to prepaid tuition plans?

Bd cpa (talk|edits) said:

7 December 2011
What I have a problem with in leaving the assets out of the calculation is that the contributions to the 529 plan may be completed gifts but they are revocable. I can change the beneficiary to myself after the dust settles in the COD issue and keep 90% of any earnings (assuming earnings and a 10% penalty for a non-qualified withdrawal). Not a bad price to pay for the potential of escaping tax on the COD income. Leaving them out seems like the "substance over form" issue is not being considered. Just my two cents but I am not the one with the client with the problem.

Ckenefick (talk|edits) said:

7 December 2011
What I have a problem with in leaving the assets out of the calculation is that the contributions to the 529 plan may be completed gifts but they are revocable.

Exactly. It's a screwy type of asset. Hence the conundrum. What exactly is the definition of "owning an asset" for insolvency calculation purposes anyway?

BD, what do you think about removing client as "custodian" and replacing custodian with, say, client's father?

Death&Taxes (talk|edits) said:

7 December 2011
I am curious about change of custodian. Does this change the flow of the money should it have to be returned? Can't a grantor trust name anyone but the grantor as the trustee?

What are the conditions for 'putting the funds back in the tube?' Assuming the child is not of college age, would he later have any legal recourse, such as he might if money were removed from an UGMA account? Can insolvency be conditional? Are the 529 trust documents any help, for I would think each one, depending on the state and institution, is slightly different?

Roy Dale was pilloried for suggesting legal help in another question, but here it could be needed.

Bd cpa (talk|edits) said:

7 December 2011
Has the COD event occurred already? If so, converting to prepaid plans or ownership may be too late.

What state are you in?

I think if your client is ever audited (and the transfer is discovered)the IRS would attempt to call the transfer a sham for tax avoidance. I would think your best option would be to document your files as to why it doesn't belong on the worksheet in case the omission is questioned. The worksheet stays in your files. I have had it requested in a CP2000 before but it did not request any backup of balances or lack thereof. There will be a lot of 982s filed in 2011.

IF you can determine you can leave if off, do you disclose this position on 8275 to avoid a potential penalty for lack of substantial authority? Just asking, not sure. Interesting point though.

Bd cpa (talk|edits) said:

7 December 2011
or I should have asked what state is your client in?

Ckenefick (talk|edits) said:

7 December 2011
SC...and all 529's are the SC Plan (Future Scholar).

Bd cpa (talk|edits) said:

7 December 2011
just checking for community property state options in completing the worksheet.

Dennis (talk|edits) said:

7 December 2011
Age of the plan may make a difference. Faulty memory recalls mid 1997 is pertinent.

Ckenefick (talk|edits) said:

7 December 2011
Dennis, what do you mean by that?

Death&Taxes (talk|edits) said:

7 December 2011
PL 105-34 in 1997 from RIA

"“(6) Transition rule for pre-August 20, 1996 contracts. In the case of any contract issued prior to August 20, 1996, section 529(c)(3)(C) of the Internal Revenue Code of 1986 shall be applied for taxable years ending after August 20, 1996, without regard to the requirement that a distribution be transferred to a member of the family or the requirement that a change in beneficiaries may be made only to a member of the family.”

Prior to amendment, para. (e)(3) read as follows:

“(3) Qualified higher education expenses. The term 'qualified higher education expenses' means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution (as defined in section 135(c)(3)).”

Could this be it?

WEISSEA (talk|edits) said:

7 December 2011
Faulty memory recalls mid 1997 is pertinent

On August 5,1997 529's were modified by the Tax Payer Relief Act of 1997. Prior to that, 529's followed the general gift & estate tax principles which would require a contribution to be an incomplete gift and the account to remain in the owners estate. After 8-5-1997 ,contributions are completed gifts and account is not in owners estate. So 529's are a unique wrt gift and estate.

Since account owner has full control of the account and can change benificary to himself and withdraw the funds at anytime, I don't see it as an exempt asset for insolvency unless the insolvency calculation for COD has "exempt assets"? (529's are exempt assets in bankruptcy for contributions more than 2 years prior to BK filing) Note Medicaid counts a 529 as an asset for owners eligibility and with college financial aid, the FASA counts it as a parents asset even though the student is the 529 beneficairy.

As Dave said above there maybe no answer withour a TC case.

Dennis (talk|edits) said:

7 December 2011
Dates seem right. There is a set of transitional rules that apply to transfers made in the year or so after August 20, 1996. Not considered taxable gifts and attributable value includible in gross estate. No idea of effect on bankruptcy.

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