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COLLEGE SAVINGS 101

Why can't you donate your 529 plan to charity?
http://www.savingforcollege.com/articles/why-cant-you-donate-your-529-plan-to-charity-737

Posted: 2015-03-05

by Joseph Hurley

Financial Professional Content

Imagine this scenario: Your clients, a married couple, established a 529 account for their grandchild several years ago and funded it with $120,000, utilizing the 5-year election to avoid reporting a taxable gift. The account has performed well and grown in value to $200,000.

Now it turns out the grandchild does not have any need for the 529 plan. He has been accepted to the U.S. Military Academy at West Point. And he has no siblings.

The grandparents, being philanthropic, decide they will donate the 529 account to the college at which they met and studied. This way they will be helping students with financial need attend the college. They also intend to claim a charitable deduction on their income tax return.

The problem: The tax law does not appear to support their intentions. Under current rules, a taxpayer cannot simply donate a 529 account to an educational institution or other charity, even when targeted for scholarship funding.

One stumbling block is that the clients' grandchild is named as 529 account beneficiary. The college will want to change the beneficiary at some point to a deserving scholarship recipient who has no relation to the original beneficiary. Section 529 requires that the new beneficiary be a family member of the old beneficiary. There's no exemption for charitable organizations.

(This may seem a bit ironic since a 529 account established by a charitable organization does not require that a beneficiary be named to the account. This exception was inserted into the law to accommodate the use of 529 plans as scholarship funding vehicles by 501(c)(3) organizations.)

Another unsettled issue is the ability to claim a charitable deduction for the donation of a 529 account. Will the IRS allow the deduction? If so, what is the amount of the deduction? (Is it ordinary income property or a capital asset?) The worst result: the donation must be treated as a distribution to the account owner subject to tax and 10% penalty on the earnings portion.

To my knowledge, the IRS has not issued any guidance or rulings with regard to these questions. Perhaps a well-reasoned legal opinion exists that supports a taxpayer's ability to donate a 529 account, and a 501(c)(3) organization's ability to accept such donation, but I have not seen it.

It would be wonderful if something happened—coming from either the IRS or Congress—to permit charitable donations of 529 accounts. Even just an exception from the 10% penalty would be a step in the right direction. Colleges that struggle with fundraising would have a whole new resource available to them, and would actively lobby in support of 529 plans the next time the President or Congress propose new restrictions.

What's more, needy students will have more opportunity to gain scholarship funds. I'm fairly certain that we would see many millions of dollars repurposed in this manner. This would be a win-win for everyone.

Financial Professional Content

Imagine this scenario: Your clients, a married couple, established a 529 account for their grandchild several years ago and funded it with $120,000, utilizing the 5-year election to avoid reporting a taxable gift. The account has performed well and grown in value to $200,000.

Now it turns out the grandchild does not have any need for the 529 plan. He has been accepted to the U.S. Military Academy at West Point. And he has no siblings.

The grandparents, being philanthropic, decide they will donate the 529 account to the college at which they met and studied. This way they will be helping students with financial need attend the college. They also intend to claim a charitable deduction on their income tax return.

The problem: The tax law does not appear to support their intentions. Under current rules, a taxpayer cannot simply donate a 529 account to an educational institution or other charity, even when targeted for scholarship funding.

One stumbling block is that the clients' grandchild is named as 529 account beneficiary. The college will want to change the beneficiary at some point to a deserving scholarship recipient who has no relation to the original beneficiary. Section 529 requires that the new beneficiary be a family member of the old beneficiary. There's no exemption for charitable organizations.

(This may seem a bit ironic since a 529 account established by a charitable organization does not require that a beneficiary be named to the account. This exception was inserted into the law to accommodate the use of 529 plans as scholarship funding vehicles by 501(c)(3) organizations.)

Another unsettled issue is the ability to claim a charitable deduction for the donation of a 529 account. Will the IRS allow the deduction? If so, what is the amount of the deduction? (Is it ordinary income property or a capital asset?) The worst result: the donation must be treated as a distribution to the account owner subject to tax and 10% penalty on the earnings portion.

To my knowledge, the IRS has not issued any guidance or rulings with regard to these questions. Perhaps a well-reasoned legal opinion exists that supports a taxpayer's ability to donate a 529 account, and a 501(c)(3) organization's ability to accept such donation, but I have not seen it.

It would be wonderful if something happened—coming from either the IRS or Congress—to permit charitable donations of 529 accounts. Even just an exception from the 10% penalty would be a step in the right direction. Colleges that struggle with fundraising would have a whole new resource available to them, and would actively lobby in support of 529 plans the next time the President or Congress propose new restrictions.

What's more, needy students will have more opportunity to gain scholarship funds. I'm fairly certain that we would see many millions of dollars repurposed in this manner. This would be a win-win for everyone.

 

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