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529 gifting question

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  • Avatar JBME 
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    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 
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    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 ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #214547 Reply
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    ENT Doc ENT Doc 
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    But your iPad did add a w. 😉

    #214550 Reply
    MPMD MPMD 
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    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 
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    but a friend was asking if this was legally legit

    Click to expand…

    no.

    #214659 Reply
    Liked by JBME
    Faithful Steward Faithful Steward 
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    If the grandparent is married, and the spouse is willing, they could simply use split gifting.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    http://www.fswealthadvisors.com | (717) 496-0900

    #214678 Reply
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    Avatar JBME 
    Participant
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    Joined: 03/26/2018
    Disability Insurance

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

    #214680 Reply

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