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

the account and why does not the same mechanism apply when the account owner
is changed?
G. Aggregation of Distributions. Section 529 provides that, except to the extent
provided by the Secretary, all distributions during a taxable year shall be treated
as one distribution. Code § 529(c)(3)(D)(ii).
H. Aggregation of Accounts. Section 529 provides that, to the extent provided by
the Secretary, QTPs of which a particular individual is a designated beneficiary
shall be treated as one program. Code § 529(c)(3)(D)(i). However, Notice 2001-
81 states that “it is expected that the final regulations will provide that only
accounts maintained by a § 529 program and having the same account owner and
the same designated beneficiary must be aggregated for purposes of computing
the earnings portion of any distribution. For this purpose, a State that has both a
prepaid § 529 program and a § 529 savings program should consider each
program separately for purposes of calculating the earnings portion of any
distribution from either the prepaid or the savings program.”
I.R.S. Notice 2001-81, 2001-2 C.B. 617, anticipates that accounts established by
the same donor for the same beneficiary, but under different state programs, will
not be aggregated for purposes of determining the taxable earnings portion of a
nonqualified withdrawal.
I. Federal Penalty on Nonqualified Distributions. Section 529 imposes a ten
percent federal additional tax on the earnings portion of a nonqualified
distribution. Code § 529(c)(6). The federal penalty works in the same manner as
the penalty for nonqualified distributions from a Coverdell Education Savings
Account under Code section 530(d)(4).
1. Exceptions. The federal penalty does not apply if the distribution meets
one of the following requirements: (a) is made to the beneficiary’s estate
after the beneficiary’s death; (b) is attributable to the beneficiary’s being
disabled; or (c) is made on account of a scholarship, allowance or payment
described in section 25A(g)(2) received by the account holder to the extent
the amount of the distribution does not exceed the amount of the
scholarship, allowance or payment.
2. Hope and Lifetime Learning Credits. The federal penalty does not
apply to a distribution that is subject to income tax because the education
expense for which it was used was used to claim the Hope or Lifetime
Learning credit. Job Creation and Worker Assistance Act of 2002.
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