Dear College Money Guru,
I have two 529 plans for my grandchildren. Can I transfer ownership of the plans to the parents without creating tax problems for them?
You might actually be helping the parents avoid tax problems by transferring ownership of your accounts to them. That's because they will be able to more easily coordinate the use of the 529 accounts when it comes time to withdraw.
Here's an example of what can happen when you keep the 529s under your ownership.
Assume the parents have opened their own 529 accounts. When it comes time for the oldest child to go to college, the parents withdraw enough funds to pay the entire cost. Without full knowledge of their actions, you might withdraw money from your own 529 plan with the intention of handing it over to the parents or to your grandchild. But because it is unneeded, the earnings portion becomes subject to taxes and penalties.
Parental control can also help when it comes to applying for financial aid. Although the value of a grandparent's 529 plan does not get counted against the student, any distributions from that plan are treated as student income or resources which can severely impact financial aid eligibility.
Because college savings accounts can be a difficult asset to deal with when parents get divorced or separated, I would encourage you to consider transferring ownership to the grandchildren rather than to the parents. Although the parents will still act as account custodians while their children are minors, doing this helps to ensure that the funds are ultimately used for each respective grandchild.
Transferring ownership to the account beneficiary also avoids a potential gift-tax issue. Although there is nothing that currently says the mere change of ownership to the parents is to be treated as a gift from you to them, the IRS has proposed new rules that could in the future have that effect.
You will need to check with your 529 plan administrator about the process involved with changing ownership. For example, a 529 plan managed by Fidelity Investments will generally treat an owner change as a reportable distribution, which you want to avoid. And New York's 529 plan does not permit owner changes at all. If you face this sort of problem with your plan, you may have to first roll over your account to a more change-friendly 529 plan.
Ask the adviser