IRS: Stop Using 529 Plans To Evade Gift Tax

In some cases, abuse may arise “if a person contributes a large sum to an account for himself or herself and then changes the [designated beneficiary] to a member of his or her family who is in the same or a higher generation … as the contributor,” officials write. “The contributor’s contributions to his or her own account would not trigger the gift tax because an individual cannot make a gift to himself or herself. The contributor may claim that the subsequent change of [designated beneficiary] to a member of the contributor’s family who is in the same or a higher generation avoids the gift tax under the special transfer tax rules of section 529.”

In other cases, abuse might arise because the IRS now treats contributions to accounts as completed gifts to the designated beneficiary “even though the account owner … may be able to withdraw the money at his or her discretion,” officials write.

The rulemaking notice refers to topics such as the account owner’s liability for any gift or generation-skipping transfer tax imposed in connection with a taxable change of beneficiary; the account owner’s liability for taxes imposed on cash withdrawn from a 529 plan; and special rules that apply in the cases of individuals who contribute to 529 plans for their own benefit.

A copy of the IRS 529 plan notice is available