Probate & Trust Law Section Conference Manual ... - Minnesota CLE

shall include the portion of such contributions properly allocable to
periods after the date of the death of the donor.”
3. Inclusion in Beneficiary’s Estate. Section 529 cryptically says that
amounts distributed on account of the death of a beneficiary are subject to
estate tax, without defining what is meant by “distributed.” The
legislative history and the proposed regulations suggest that the value of
any interest in a section 529 savings account will be includible in the
estate of a deceased beneficiary. This position does not make sense
because the beneficiary does not have any control over the account and the
beneficiary’s estate will not necessarily receive the account funds. The
Advance Notice proposes five rules:
Rule 1. If the [Account Owner] distributes the entire
section 529 account to the estate of the deceased [Designated
Beneficiary] within 6 months of the death of the [Designated
Beneficiary], the value of the account will be included in the
deceased [Designated Beneficiary’s] gross estate for Federal estate
tax purposes.
Rule 2. If a successor [Designated Beneficiary] is named in
the section 529 account contract or program and the successor
[Designated Beneficiary] is a member of the family of the
deceased [Designated Beneficiary] and is in the same or a higher
generation (as determined under section 2651) as the deceased
[Designated Beneficiary], the value of the account will not be
included in the gross estate of the deceased [Designated
Beneficiary] for Federal estate tax purposes.
Rule 3. If no successor [Designated Beneficiary] is named
in the section 529 account contract or program, but the [Account
Owner] names a successor [Designated Beneficiary] who is a
member of the family of the deceased [Designated Beneficiary]
and is in the same or a higher generation (as determined under
section 2651) as the deceased [Designated Beneficiary], the value
of the account will not be included in the gross estate of the
deceased [Designated Beneficiary] for Federal estate tax purposes.
Rule 4. If no successor [Designated Beneficiary] is named
in the section 529 account contract or program, and the [Account
Owner] does not name a new [Designated Beneficiary] but instead
withdraws all or part of the value of the account, the [Account
Owner] will be liable for the income tax on the distribution, and
the value of the account will not be included in the gross estate of
the deceased [Designated Beneficiary] for Federal estate tax
purposes.
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