Can I start 529 plans for my niece & nephew without my sibling knowing?

Question

If I wanted to start a 529 plan for them now to give to them at the end of their high school career as a surprise to both them and their parents, is it possible to do so?

My niece and nephew are both under two years old, so I would have a significant amount of time to make small pre-tax contributions that would add up to a first semester / year of college for them by the time they're ready to attend. I would like to have this be a surprise to my sister and brother-in-law as well just in case plans change (and to keep the surprise factor), but I'm not sure of their role/requirements when starting the 529 plan.

• Do I need their authorization to initiate the plan?
• Is there an alternative plan that I could start to achieve this?

Answer 1

That's a really nice thing that you're planning to do for your niece and nephew, and it is possible to do!

You do need to provide a social security number for the beneficiary of the 529 plan, so to name your niece and nephew as beneficiaries, you will need to get their social security numbers. If you can get these without tipping off the parents, great! Otherwise, you can always change the beneficiary of a 529 plan. You can start the plans with yourself as beneficiary and then get your niece and nephew's SSNs and change the beneficiary to be them after they graduate.

Answer 2

Many states have 529 plans that allow you to name yourself as the beneficiary, and you can later change the beneficiary to a qualified family member without tax implications. Regardless of state, nieces and nephews count as qualified family members and the generation-skipping transfer tax only applies when the new beneficiary is two or more generations below the current beneficiary, so there would be no tax implication for changing beneficiary from you to your niece/nephew. There are gift-tax implications if you contribute in excess of the annual gift exclusion (currently $15,000) to a plan where you weren't the beneficiary, but the IRS allows an up-front 529 contribution of 5x the annual exclusion without gift-tax implications (assuming no other gifts for that 5-year period).

If your state's plan doesn't allow naming yourself as the beneficiary or is undesirable in other ways then shop for a different plan, you are not limited to your home state's plan.

Edit: Comments incorrectly suggest gift-tax implication when changing beneficiary from self to niece/nephew, so revised for clarity.

Answer 3

I'll stipulate that this is possible. I will however suggest that it is not a good idea, for a few reasons.

First and foremost, saving for college is a serious thing and it has a major impact on the child's, and their parents', lives. The child will likely make choices with their life based on, among other things, how much money they expect to have saved for college, which can begin years before college itself. The parents will be making choices - how much to save, how to save it - also years and years before.

And while you might think of surprising them in order to avoid them making more selfish choices - if they know you're good for $75k (let's say) then that's 3 more European vacations they can take, right? - it may well work the other way around. A parent who knows they can save at most $50k for college may simply tell their child to plan for state school and be done with it. Knowing there's another $75k around might mean that they save more, because they now know they could target a better school. Having full knowledge of a situation is nearly always better than having partial knowledge. If you are worried about your sibling making different and poorer choices knowing about the gift, put conditions on the gift (in which case you can't use a 529 I don't believe, but that might be the choice here).

Second, if you're going to actually give the money to the child, you should do so as early as possible in order to avoid risks related to bankruptcy or lawsuits against you. Money you've saved in a 529 account for yourself will still be reachable in most cases by creditors - while I'm sure you hope to never have to worry about that, you never know what might happen with your life. So establish the 529 account in their name, not in yours. Once it's in their name it's safe against creditors to you OR your sibling - it's the property of the child, who should be fairly safe from creditors and lawsuits in most cases until they reach their majority.

Third, if you are going to establish it in the child's name, then you need to talk to the parents and tell them you're doing it. Not like "it's required by law", but you need their SSN - and if you're thinking of finding that out with a clever ruse, stop now; this isn't engagement ring sizing. If you do find out the SSN without letting your sibling know, you risk them thinking you're trying to steal the child's identity if they do find out.

Answer 4

Do set up a plan for the niece and nephew! That is great! Be sure to open the account in YOUR name, and list the child as the beneficiary. Hence, you will need two plans but this depends on the ages, investment strategy, etc. This does NOT have an implication on FAFSA (The FAFSA collects info on the student/parental income/assets). There is only a IRS gift tax if the amount is more than $15,000 per child, per year. Hopefully you can start two plans (getting the SS# from your relative) and hopefully your state offers a tax deduction for your contributions (from your state's income tax that you file each year --- each state determines their incentive...call to check on it! :) Need to know more about the plan your state offers? Go to collegesavings.org which is the National Treasury Clearinghouse. Happy Saving!