I've also given a lot of thought to the question of how 529s might be used to sidestep potential estate taxes, and am glad to now be finding you both weighing in with the same general conclusions I've come to, namely that the intentional use to such end, without plausible educational intent, is almost certain to be disallowed.That was generally the response to the advance notice of proposed rulemaking: There are already a bunch of tools in place for the IRS to prevent this kind of abuse, there is no need for further regulation.I'm not sure if the $1M fraternal 529 idea works or not. I think it might have step transaction doctrine issues also. And there is the practicality - yes, you maybe get $1M out of your estate (yay?), but the money is now your brother's (meh?). Might be an idea for someone with no kids of their own and who likes their brother better than charitable causes.
And it's not just because of the step doctrine. There's another avenue for this to be disallowed that's found in the original codification of QSTPs/QTPs: namely that the intended use of the plan was delimited as a mechanism for a contributor either to prepay a beneficiary's qualified higher education expenses at an eligible educational institution or to contribute to an account for paying those expenses. If it can be established that the 529 account was not credibly set up for this purpose, it can be disallowed as a valid 529 account and all the tax-advantaged provisions that would otherwise accrue to it would be stripped.
This notice of proposed rulemaking defines the allowable use even more narrowly and explicitly (bold added):
https://www.irs.gov/pub/irs-regs/10617797.pdf
Section 529 provides tax-exempt status to qualified State tuition programs (QSTPs) established and maintained by a State (or agency or instrumentality thereof) under which persons may (1) purchase tuition credits or certificates on behalf of a designated beneficiary entitling the beneficiary to a waiver or payment of qualified higher education expenses, or (2) contribute to an account established exclusively for the purpose of meeting qualified higher education expenses of the designated beneficiary.
Statistics: Posted by aleph0 — Wed Sep 11, 2024 9:26 pm