529 Gift to non-family member; Beneficiary changes; Tax and FAFSA implications

A friend would like to give us their 529, where their grandchild is the beneficiary, where under $10K is left in the account. We both live in Oregon. They were going to Change the account owner to my husband and then he would change the beneficiary to our child. However, the change beneficiary/transfer form says the new beneficiary must be a member of the family of the original beneficiary. Has anyone else dealt with this? Is there another solution?

Also, would there be tax implications for us or the gifter? Any FAFSA implications?

Oregon college savings gave me 3 different answers to this, so they clearly are not up to date on their own rules. Thanks!

You can only change a 529 beneficiary to an eligible relative of the current beneficiary. If your friend’s grandchild is not an eligible relative to the person who is intended to be the next beneficiary, the 529 account cannot simply be transferred to the intended next beneficiary. If your friend really wants the remaining funds to go to your child, the easiest solution might be for your friend to liquidate the account, take the hit on the tax and penalty for the earnings portion of the non-qualified distribution, and gift the remaining funds to your child (if the funds are directly gifted to your child, they will likely need to go to a UTMA account if your child is a minor under your state’s UTMA provisions).

There are no tax implications for a gift of less than $10,000.

That depends on when your child will be in college. Also, if the school of attendance is a Profile school, the impact on institutional need-based aid will depend on how the school’s Profile methodology treats gifts received by the student.

Once the money is in the UTMA, I think it can be used to fund an UTMA-based 529 if that is of any help. That would treat it significantly more favorably for college financial aid assessment than if it is in a regular UTMA account.

Yes, once the friend’s 529 has been liquidated and the funds have been gifted to OP’s child, they could then be used to open a new UTMA/custodial 529 owned by and for the benefit of OP’s child.

Child is 18, and will be starting college in the fall. If the 529 is in the child’s name, then there would be FAFSA implications? Would it be as income (due to gift) plus asset (if money is in account at time of filing FAFSA.) Or would student income increase only come into play when withdrawing from 529?

What if the 529 was in parent name?

School is not a Profile school.

Would it be possible for friend to change account owner to my husband…and then he liquidate the account? We would then pay the taxes and penalty fee. What would the tax and FAFSA implications be in this scenario?

Thank you to everyone for responding!

Thank you for your responses!


Yes, under current FAFSA rules both a hit as income and as an asset if the funds are available at the time of filing FAFSA. Note that income is reported on a prior-prior basis, so income or a gift received in 2022 will not be reported on FAFSA until the FAFSA for the 2024-2025 academic year. ALSO, the FAFSA rules will be changing, I believe with the 2023-2024 FAFSA (unless the planned revisions have been pushed back), such that gifts and distributions for the student’s benefit from 529 accounts not owned by the student or a reporting parent will not need to be reported on FAFSA, as they have been up until now. (Distributions from 529 accounts owned by the student or a reporting parent have never been reported on FAFSA as income, but they have been and will continue to be reported as an asset.)

529s owned by the parent or owned by the student (such as a UTMA/custodial 529) are both reported on FAFSA as a parent asset, which is much more favorable treatment than if reported as a student asset.

This depends on the rules for the particular 529 plan. Some allow ownership changes to varying extents, and some plans are less flexible.

No gift tax considerations if $16k or less, and no FAFSA income implications as this would be considered a gift to a parent.

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