Irrevocable Trust

Submitted by ShipsnGiggles on Wed, 2024-01-17 14:17

Is it permissible to distribute funds from an irrevocable trust to fund a 529 account -using the annual gift exclusion ($18,00)? in essence making it a tax free distribution. It’s from a grandfather to his grandson.



Submitted by William Tuttle on Wed, 2024-01-17 16:48

  • If the grandson is a beneficiary of the trust. The funds cannot be distributed to a 529 owned by you or anyone other than that beneficiary.
  • This is true even if they are the “beneficiary” of the 529. This is because a 529 “beneficiary” is really only a tax status. A 529 beneficiary can be changed or assets rolled over to another beneficiary at will.
  • Even worse a 529 account owner can make non-qualified distributions for their own benefit. Such a distribution would subject to ordinary income taxes and an early withdrawal penalty, but nevertheless permissable.
  • Either of the two above bullet points violates the trust beneficiary’s sole interest.
  • I believe there are only two permissable options to achieve similar desired 529 results.
  • If the trust beneficiary is a minor, the distributions could possibly be made to a UTMA 529 account with trust beneficiary as 529 beneficiary and the trustee as custodian.
  • By far the best option is for the Trust to open the 529 account. Yes, a trust can open (own) and fund a 529 account. Also, since both beneficiaries are the same, I don’t believe there would be any gift tax reporting considerations.
  • Maybe BSteiner (Bruce Steiner) a foremost Trust and Estate attorney who sometimes posts on here will see this thread and verify the above.

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