529 gifting question

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  • Avatar JBME 
    Status: Spouse
    Posts: 480
    Joined: 03/26/2018

    If a grandparent, for their own convoluted reason, wants to gift more than $75k to a grandchild’s 529 account and not deal with filling out another tax form but doesn’t want to gift again next year or in the future, could the grandparent directly put $75k in the 529 to take advantage of the 5-year rule for 529s and then gift their child $15k with the promise that the child would then take the $15k and put it into the grandchild’s 529? From a tax perspective it would look like the parent gifted to a child and could take a state tax deduction.

    This seems convoluted to me but a friend was asking if this was legally legit. Does anyone know?

    #214544 Reply
    jfoxcpacfp jfoxcpacfp 
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7939
    Joined: 01/09/2016

    Do you remember all of that talk about the “step transaction” regarding backdoor Roth IRA’s? This is a kind of definitional example of the step transaction (I didn’t know definitional was a real word, but my iPad didn’t scold me, so I get no credit for making that word up). The answer is NO. Besides a gift is not a true gift (legally) if there are strings attached. Iow, attaching strings to the transaction is no different than the grandparents actually gifting that last $15k themselves.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ ~ [email protected]

    #214547 Reply
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    ENT Doc ENT Doc 
    Status: Physician
    Posts: 3435
    Joined: 01/14/2017

    But your iPad did add a w. 😉

    #214550 Reply
    Status: Physician
    Posts: 2400
    Joined: 05/01/2017

    I’ve actually looked into this in some depth and it’s not allowed. Nothing can be considered a gift with any strings attached.

    The common error the casual observer makes is “well how could the IRS prove that an agreement was in place.” The issue here is that when you tussle with the IRS there is no presumption of innocence, the burden of proof is always on the taxpayer to prove that an arrangement was NOT in place — this would obviously be hard to do.

    It would seem odd for a grandparent to be willing to contribute about $100k to a child’s education but balk at some basic tax planning and filing.

    #214552 Reply
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    Avatar Peds 
    Status: Physician
    Posts: 4186
    Joined: 01/08/2016
    but a friend was asking if this was legally legit

    Click to expand…


    #214659 Reply
    Liked by JBME
    Faithful Steward Faithful Steward 
    Status: Financial Advisor, Small Business Owner
    Posts: 480
    Joined: 06/12/2017

    If the grandparent is married, and the spouse is willing, they could simply use split gifting.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors | (717) 496-0900

    #214678 Reply
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    Avatar JBME 
    Status: Spouse
    Posts: 480
    Joined: 03/26/2018
    alpha investing

    appreciate these responses. the answer is a clear “no” which I’ll certainly relay

    #214680 Reply

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