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

theoretical tax universe of section 529, in which a completed gift
was made to the old beneficiary, and therefore the old beneficiary
should be the transferor of any subsequent gift.
XIII.
Annuity Taxation on Nonqualified Distributions. Section 529(c)(3)(A) provides that
any distribution under a QTP shall be includible in the gross income of the distributee in
the manner as provided under Code section 72 to the extent not excluded from gross
income under any other provision of this Chapter. Subject to sections 72(e)(2)(B) and
72(e)(9), distributions are treated as consisting of two components: 1) principal or
contributions, which are generally not taxed, and 2) earnings, which may be subject to
tax. Code §§ 72(e)(2)(B) and (e)(9). The earnings portion of the account is equal to the
value of the account at a particular time minus the investment portion of the account.
Prop. Treas. Reg. § 1.529-3(b). The earnings ratio for the account is equal to the earnings
portion of the account divided by the total value of the account. Id. The earnings portion
of a particular distribution is determined by multiplying the earnings ratio by the amount
of the distribution. Id. Generally, this would mean that the earnings portion of the
distribution would be subject to income tax. Prop. Treas. Reg. § 1.529-3(a).
A. Earnings. The proposed regulations define “earnings” as follows:
Earnings attributable to an account are the total account balance on
a particular date minus the investment in the account as of that date.
Prop. Treas. Reg. § 1.529-1(c).
B. Investment in the Account. The proposed regulations define the “investment in
the account” as follows:
Investment in the account means the sum of all contributions made
to the account on or before a particular date less the aggregate amount of
contributions included in distributions, if any, made from the account on
or before that date.
Prop. Treas. Reg. § 1.529-1(c). Note this definition does not limit qualifying
contributions only to contributions made by the account owner.
C. Earnings Ratio. The proposed regulations define “earnings ratio” as follows:
Earnings ratio means the amount of earnings allocable to the
account on the last day of the calendar year divided by the total account
balance on the last day of that calendar year. The earnings ratio is applied
to any distribution made during the calendar year. For purposes of
computing the earnings ratio, the earnings allocable to the account on the
last day of the calendar year and the total account balance on the last day
of the calendar year include all distributions made during the calendar year
and any amounts that have been forfeited from the account during the
calendar year.
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