529 Plans and FAFSA Assets

[BelknapPoint]

What I do not understand is “parents holding assets in the name of siblings is to find parent assets that really belong to the parent but have been retitled in the name of a minor in an effort to reduce income taxes.”

Parent taxable investments are taxed at parents’ tax rate. It is/was not uncommon for parents to take their investment money and invest it under a child’s name in order to take advantage of the child’s lower tax rate. This was not a gift to the child, as the intent of the parents was always to reclaim the money when the investment was liquidated. The FA question you are asking about is designed to identify these funds and have them properly reported as a parent asset. As I mentioned, this tax avoidance strategy is less effective with the more robust kiddie tax, and it is, in my opinion, questionable both legally and ethically.

While I am familiar with the over and under 14 rules on the kiddie tax and even in the old days when you could give your kid $2000 per year in their name under a UGMA arrangement. I just do not see how that is different from a Coverdell or 529 plan for the minor sibling?

Anyone can give any child any amount of money under a UGMA arrangement, and always could. There have been and are gift tax reporting requirements, but that’s a different concern. Giving a child money under a UGMA arrangement is an irrevocable gift. Once the gift is complete, the money belongs to the child and cannot be reclaimed by the gift giver or repurposed for someone else’s use. A contribution to a 529 account where the child beneficiary is not also the account owner is treated in the eyes of the law as a gift to the child, but it is not irrevocable with respect to the current beneficiary because the beneficiary can be changed by the account owner. That’s the difference.

So under FAFSA, if I take parent money and give $2000 to a UGMA account on behalf of the sibling that is no longer a FAFSA asset?

Correct; the money now belongs to the sibling and the account custodian can only use the money for the sibling’s benefit.

However, if I take the same $2000 and put it in a Coverdell it is???

I’m not as familiar with Coverdell ESAs, but if the money is put in a parent-owned 529 with the sibling named as the beneficiary, it must be reported as a parent asset on the student’s FAFSA, because the parent has control of the account and can change the beneficiary from the sibling to the student. You see the difference? The money can potentially be used for the student’s benefit; the money in a sibling’s UGMA account cannot be used for the student’s benefit.

Also what happens if I have two over 18 in college, have 529/coverdell for each, can I exclude the other ones from each kid’s calculation?

For 529 accounts that are owned by a parent, no. (Again, I am not as familiar with Coverdell ESAs.)

Is there a way to retitle a 529 or Coverdell so I do not have to include them for FAFSA only schools for the siblings?

At least for 529 accounts, yes: if the plan allows it, change the owner to the beneficiary, and it will not need to be reported on the sibling’s FAFSA or Profile.

Since my kids will never be independent (probably not even after they graduate!) is there a downside to having the 529 in their name since it is considered a parent asset regardless for that kid’s FAFSA.

Yes, if you are the parent owner of a 529 account and you change ownership to the student beneficiary, you give up control of the money. The beneficiary cannot be changed while a custodian manages the account until the owner/beneficiary reaches the age of majority, and once the age of majority is reached, the owner/beneficiary can empty the account and use it for anything (paying tax and a 10% penalty on any earnings not used for QEE).

Would it be considered a student asset on some Profiles?

Yes; if the student is independent for FAFSA purposes, a student-owned 529 account is reported on FAFSA as a student asset (since no parental financial information is reported at all in this case).