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

Rule 5. If, by the due date for filing the deceased
[Designated Beneficiary’s] estate tax return, the [Account Owner]
has allowed funds to remain in the section 529 account without
naming a new [Designated Beneficiary], the account will be
deemed to terminate with a distribution to the [Account Owner],
and the [Account Owner] will be liable for the income tax on the
distribution. The value of the account will not be included in the
gross estate of the deceased [Designated Beneficiary] for Federal
estate tax purposes.
VIII.
Five-Year Election Issues
A. Split Gifts. Gift-splitting is permitted, so a married donor can contribute up to
ten times the annual exclusion amount ($140,000 in 2013) per beneficiary in a
single year without incurring gift tax or GST tax. Prop. Treas. Reg. § 1.529-
5(b)(2). However, if gift-splitting is elected, both spouses must make the election
on their respective returns. The Advance Notice states:
Rule 3. The election may be made by a donor and the donor’s spouse with
respect to a gift considered to be made one-half by each spouse under
section 2513.
The instructions to the gift tax return (2012) state: “If you are electing gift
splitting, apply the gift splitting rules before applying the QTP rules. Each spouse
would then decide individually whether to make this QTP election.” Applying
the gift splitting rules first is consistent with the IRS’s position (informal at this
point) that if one spouse dies during the five-year period, only that spouse’s
portion of the gift is brought back into the estate.
B. GST. The reference in the introductory phrase of section 529(c)(2) to chapter 13
(the GST rules) would seem to suggest that section 529(c)(2)(A) is intended to
make clear that contributions to a 529 account qualify for the GST annual
exclusion as well as the gift tax annual exclusion and that the five-year election
operates for purposes of both GST tax and gift tax. The proposed regulations
state that the “portion of a contribution excludible from taxable gifts under section
2503(b) also satisfies the requirements of section 2642(c)(2) and, therefore, is also
excludible for purposes of the generation-skipping transfer tax imposed under
section 2601.” Prop. Treas. Reg. § 1.529-5(b)(1). However, the proposed
regulations do not specifically state that to the extent the five-year election is
made, the GST annual exclusion applies to the contributions attributed to all five
years. The new proposed regulations should clarify this point.
C. Minimum Contribution for Proration. Section 529(c)(2)(B) permits the fiveyear
election when the “aggregate amount of contributions” to a 529 account on
behalf of any designated beneficiary “exceeds the limitation for such year under
section 2503(b).” If P makes an outright gift to C on January 1, 2012 of $5,000,
and then on June 1, 2012 makes a gift of $10,000 to a section 529 account for C,
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