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34 ACTEC J. 106 (2008-2009)
The Best of Both Worlds: Using a Trust to Make Your 529 Savings Accounts Rock

handle is hein.journals/acteclj34 and id is 106 raw text is: The Best of Both Worlds': Using a Trust to Make Your 529 Savings Accounts Rock by Susan T. Bart Chicago, Illinois* Editors' Synopsis: This article discusses I.R.C. section 529 savings accounts held in trust and propos- es the proper transfer tax treatment of such arrange- ments in light of a recent IRS Advance Notice of Pro- posed Rulemaking. The article also discusses, among other topics, the proper income tax treatment, state law concerns and drafting considerations involving trust-owned section 529 savings accounts. I. Introduction Internal Revenue Code (the Code) section 529 provides an income-tax advantaged way to save for higher education. Code section 529 permits states to establish Qualified Tuition Programs (QTPs) and provides tax benefits to taxpayers who establish sav- ings accounts under these QTPs.2 The principal income tax advantage of a section 529 savings account is that the earnings on the investments in the account are not subject to federal income tax' while retained in the account and are not subject to federal income tax when distributions are made from the account if the distributions are used for qualified higher education expenses4 at an eligible educational institution.' However, the account owner of a section 529 sav- ings account has no fiduciary duties to the beneficiary of the account. Thus the account owner could change the beneficiary or withdraw the funds himself or her- self and the beneficiary would have no grounds for complaint, even if the account owner's actions clearly violated the donor's intent. So long as the donor is the account owner, there is, of course, no risk of the donor's intent being frustrated. But when the donor becomes incapacitated or dies, the successor individ- ual account owner may be able to frustrate the donor's intent. For example, assume grandparent established section 529 savings accounts for the child of his son and the children of his daughter, expecting to transfer any funds not used for one grandchild's education to the accounts of other grandchildren who are pursuing more expensive educations, and intending to divide any funds left over equally among the grandchildren, * Copyright 2008 by Susan T. Bart. All rights reserved. I may never know how to repay my niece Cara for introducing me to the songs of Hannah Montana, particularly The Best of Both Worlds: You get the limo out front Have the styles, every shoe, every color. Yea when you're famous it can be kinda fun; It's really you but no one ever discovers. In some ways you're just like all your friends, But on stage you're a star. You get the best of both worlds Chillin' out, take it slow Then you rock out the show. You get the best of both worlds; Mix it all together and you know that it's the best of both worlds, The best of both worlds. I.R.C. § 529 also authorizes the establishment of prepaid tuition plans, but this article addresses only section 529 savings accounts. Section 529 savings accounts often also receive favorable state income tax treatment, but state income treatment varies state to state. 4 Qualified higher education expenses (QHEEs) are (i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and (ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in con- nection with such enrollment or attendance. Code § 529(e)(3)(A); Prop. Treas. Reg. § 1.529-1(c). ' An eligible educational institution means an institution which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) as in effect on August 5, 1997, and which is eligible to participate in a program under title IV of such Act. Prop. Treas. Reg. § 1.529-1(c). The defining feature of an eligi- ble educational institution is that it must be eligible to participate in Department of Education student aid programs. Id. The pro- posed regulations add: Such institutions generally are accredited post- secondary educational institutions offering credit toward a bachelor's degree, an associate's degree, a graduate level or professional degree, or anoth- er recognized post-secondary credential. Certain proprietary institutions and post-secondary voca- tional institutions also are eligible institutions. Prop. Treas. Reg. § 1.529-1(c). Institutions abroad may be eligible educational institutions. 34 ACTEC Journal 106 (2008)

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