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

[BelknapPoint]

@treegreen22

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?

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).

@treegreen22

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

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

@treegreen22

Any FAFSA implications?

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.