Frequently asked questions about ESAs -- Page 2

If my child's grandparent contributes $2,000 to my child's Coverdell account but should not have contributed anything because the grandparent's income was too high, who pays the excise tax?
Since the Form 5329 is filed with your child's tax return, it looks like your child is ultimately responsible for the penalty. How would you or your child know whether the grandparent is eligible to contribute $2,000? That is a mystery to us, too.

If my child decides not to attend college, can I change the beneficiary on the account to another family member?
The responsible individual on the account (probably you) can change the beneficiary at any time to another qualifying family member who is not yet 30 years old.

Who qualifies as a "member of the family" for rollover purposes?
A qualifying family member is the beneficiary's child, grandchild, stepchild, brother, sister, stepbrother, stepsister, nephew, niece, father, mother, grandfather, grandmother, stepfather, stepmother, uncles, aunt, first cousin, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law. The spouse of any of these relations (except for a cousin) is also a qualifying family member. The beneficiary's interest can also be transferred tax-free to a spouse or former spouse because of divorce. The new beneficiary must be under age 30 at the time of rollover.

If I want to move the assets in the Coverdell account to a different financial institution, how do I accomplish this?
You may take a rollover distribution from an existing Coverdell education savings account without triggering tax or penalty if you deposit the funds within 60 days into a different Coverdell education savings account for the same beneficiary or for any other qualifying member of the family. This 60-day rollover may be accomplished only once in a 12-month period.

Can we move the funds from my child's Coverdell education savings account into a 529 plan?
Yes. A withdrawal from a Coverdell education savings account is tax-free to the extent that contributions are made to a 529 account for the same beneficiary in the same taxable year.

Apparently it doesn't matter if you use your own funds in contributing to the 529 plan when accomplishing this rollover (so that you can be the account owner) or if you use the funds received by your child from the Coverdell account (in which case it seems that your child or legal representative should be the account owner of the 529 plan). Of course, if you use your own funds, then you still need to think about what to do with the Coverdell education savings account withdrawals funds placed in the hands of your child. Your choice of approach may also have different gift tax ramifications.

I know that with a 529 plan I keep complete control of the account as the account owner and I can even ask that the account value be refunded to me. Does it work the same way with a Coverdell account?
No, with a Coverdell account the trustee or custodian must administer the account for the benefit of the child. Any withdrawals from the Coverdell account must be for the benefit of the designated beneficiary and should not be refunded to the parent or other person who establishes the account.

Because the beneficiary of the Coverdell account is a minor at the time contributions are made, an adult is named as the "responsible individual" when the Coverdell account is first established. The responsible individual is generally the parent or guardian of the beneficiary. The institution at which you establish the Coverdell account will have policies determining the decision-making authority for the account. As the responsible individual, you may be able to retain that authority for as long as the account is open. It must be distributed within 30 days after the beneficiary reaches age 30. Or, you may be allowed to transfer that authority to the child once he or she reaches the age of majority.

If I am the responsible individual, can I prevent my child from using the funds for something other than college?
Yes, to a certain extent you have that capability, and so it may be better than a custodial account established under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) in that regard. But if the account is not completely withdrawn by the time the beneficiary turns age 30, the balance will be paid to the beneficiary at that point. If the beneficiary dies, the account will be paid to the beneficiary's estate unless his or her legal representative authorizes a change in the beneficiary to a surviving spouse or other family member under age 30.

Do I have the option to change the beneficiary to another family member at any time?
Generally, that is true, as long as you are the responsible individual and the agreement provides you with this right at the time you establish the account. You are permitted to change the beneficiary to another member of the family (as that term is defined under the law) without triggering income tax and penalty, provided the new beneficiary is under the age of 30.

Let's say I wish to establish a Coverdell account for my grandchild. Is it true that I will not be able to change the beneficiary or ask for a refund of the account in the future?
That is correct. You can name either the parent or guardian of your grandchild as responsible individual, but you are probably not going to be able to name yourself. If you prefer that the parent/guardian not have the ability to change beneficiaries after you establish the account (you want the account to remain with your named beneficiary no matter what happens in the future) you should look to restrict the responsible individual's powers on the account agreement.

In any event, you as grandparent (or uncle, aunt, neighbor, etc.) do not have the same ability to retain control that a 529 plan generally affords. This may play a part in your decision as to which vehicle to use.