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

a. Proposed Regulations Tax the Beneficiary. However, the
proposed regulations treat the old beneficiary as the donor, even
though the account owner controls the change of beneficiary. The
Preamble to the Proposed Regulations states:
Also, because a contribution after August 5, 1997,
is a completed gift from the contributor to the designated
beneficiary, any subsequent transfer which occurs by
reason of a change in the designated beneficiary to the
account of another beneficiary is treated, to the extent it is
subject to the gift and/or generation-skipping transfer tax,
as a transfer from the original designated beneficiary to the
new beneficiary. This is the result even though the change
in beneficiary or the rollover is made at the direction of the
contributor under the terms of the contract.
The Proposed Regulations are consistent with the Committee
Reports, which state:
[A] transfer from one beneficiary to another beneficiary (or
a change in the designated beneficiary) will be treated as a
taxable gift from the old beneficiary to the new beneficiary
to the extent it exceeds the $10,000 present-law gift tax
exclusion.
H.R. REPT. NO. 148 (H.R. 2014), at 327 – 328; H.R. CONF. REPT.
NO. 105-220 (H.R. 2014), at 356, 364.
Thus the old beneficiary is responsible for any gift and GST taxes
if the new beneficiary is of a lower generation! Prop. Treas. Reg.
§ 1.529-5(b)(3)(ii). There are legal and practical problems with
treating the old beneficiary as the account owner. The Advance
Notice notes that “several comments on the 1998 Proposed
Regulations raised concerns about the imposition of tax on the
former [Designated Beneficiary]. In many cases, the [Designated
Beneficiaries] are minors who may not be aware of the existence
of the account for that benefit.”
b. Advance Notice Taxes the Account Owner. The Advance
Notice proposes to assign the tax liability to the account owner by
treating a change of beneficiary that is subject to gift tax “as a
deemed distribution to the [Account Owner] followed by a new
gift.” Presumably, the deemed distribution would fall within the
rollover rule exception of section 529(c)(3)(C)(i) and therefore
would not be treated as a nonqualified distribution. See also Code
§ 529(c)(3)(C)(ii). However, treating the account owner as the
transferor for gift and GST tax purposes is inconsistent with the
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