Are there any CPAs on here who can explain something to me?

[LoveBWVVBR]

My CPA is not explaining this well to me, and I really need an answer. We are having a baby this year. I need to understand how much we can put away for the baby's education each year w/o triggering a gift tax. I know that the limit is 22K per couple, and that we could put away 110K at once in the 529 plan if we did the 5-year averaging thing. We don't want to do this because we are not 100% sure that we wouldn't want to contribute to something else in those 5 years.

Here is the exact situation. We'd like to contribute the 22K annually to the 529 and also have a relative write a 2K check annually for a Coverdell ESA (we will give the 2K to this relative annually, as we do not meet the requirements to fund the Coverdell ourselves). My spouse or I will be the custodian of the 529 and the Coverdell ESA. Do we need to drop the 529 contribution to 20K in order to fund the Coverdell w/o triggering the gift tax? Is there another way around this, such as making the relative the custodian of the Coverdell?

 

[Bob Slydell]

I guess 529 plan contribution limits must vary from state to state, because in Ohio, the plan we belong to has no contribution limit per year, just a total contribution limit of $279,000 (their estimate on the maximum amount necessary for total education expenses for one child). I can't find anything about contributions triggering a gift tax at all, but again, it might vary from state to state.

As far as I know, 529 plans and Coverdell plans are not mutually exclusive. You can contribute to a Coverdell up to the $2,000 per beneficiary, as long as you qualify, regardless of other contributions to other funds.

 

[LoveBWVVBR]

Since 529s are considered a completed gift to the beneficiary, they do trigger a gift tax for anything above 22K per year (or 110K averaged over 5 years). Also, everything contributed to the account goes against the custodian's gift-tax exclusion, so even if grandma and grandpa make a contribution this would go against our 22K exclusion for the year. To put in the total lump sum allowable (depends on the state) would be to take away from the unified credit on the estate. We don't see the sense in doing that since we can spread it over X number of years and not take away from the unified credit, KWIM?

The Coverdell IS mutually exclusive from the 529, but it looks like it's also a completed gift to the beneficiary. That's why I'm wondering if it also goes against our 22K gift tax exclusion.

Here are some of the links that I've used to research the gift tax on the 529...again, they say nothing about whether or not the Coverdell would count against the gift tax exclusion if 22K were contributed to the 529 annually, though.

http://www.finaid.org/savings/gifttaxes.phtml
http://www.360financialliteracy.org...es/529+plans/Estate+Planing+and+529+Plans.htm

 

[Bob Slydell]

According to the first link you posted, Coverdell does get included with 529 in regards to gift tax (BTW, I never knew that 529 contributions were considered a gift -- thanks for that info).

But if you're contributing $22,000 and a relative is donating $2,000, the two don't get added together as they're coming from separate taxpayers. Then again, if you're giving the $2,000 to someone to contribute it to your beneficiary, that's probably technically the same thing as gifting it yourself, so I would probably guess that you're initial thought was accurate (that you'd have to knock your contribution down to $20,000 a year).

It's a grey area, though -- but if you or your relative was ever audited, it would be pretty easy to figure out that you gave $2,000 to your relative for the sole purpose of them turning around and contributing it back to your child. I wouldn't take that chance.

 

[LoveBWVVBR]

I just saw what you're talking about on the first link. I don't know how I missed that. I guess that the total for the 529 and the Coverdell would be 22K annually, then.

We aren't eligable for the Coverdell contribution ourselves because of the income limits. Is it really shady to have a sibling who is eligable make the contribution? If so, I won't do it. I could open the account with one of our sibs as custodian and allow other relatives to contribute to it if they wanted to, though. That would free up our 22K for the 529 and shouldn't look shady in an audit, right?

Also, from something I read online, it looks like anything contributed to these accounts counts as a gift against the custodian. If my folks or in-laws wanted to contribute, I'd either have to have them set up their own 529 with them as custodians and my child as a beneficiary, or else I'd have to count it towards our 22K max per year. Either way, that seems silly.

 

[LoveBWVVBR]

UGH, and now for another question. Are 529 plans and Coverdell accounts considered "custodial" accounts even though they are completed gifts to the beneficiary? I was just rereading the first link, and I came across this:

<Any money in custodial accounts for which you are the custodian will be counted as part of your taxable estate. To avoid this, select someone other than you or your spouse as the custodian or trustee.>

Our estate planning attorney told us to keep the 529 OUT of our revocable living trusts because it's a completed gift and is not considered part of the taxible estate, and we subsequently had a 2nd estate planning attorney confirm that 529s weren't considered part of the federal taxible estate. I'm so confused now.

 

[Bob Slydell]

We aren't eligable for the Coverdell contribution ourselves because of the income limits. Is it really shady to have a sibling who is eligable make the contribution? If so, I won't do it. I could open the account with one of our sibs as custodian and allow other relatives to contribute to it if they wanted to, though. That would free up our 22K for the 529 and shouldn't look shady in an audit, right?

As long as they're contributing their own funds to the account, it's fine. But if you're writing them a $2,000 check and then they're writing a $2,000 check to your child's account, it would be pretty obvious what was going on.

As far as the estate planning stuff goes, sorry, I can't help you. I have no estate planning experience. Heck, I'm not even a tax accountant. I am a CPA, just not a practicing one.