Background: Our older daughter is entering 11th grade and our younger daughter is entering 8th grade. Their grandparents have set up 529 plans for each girl with considerable amounts in them. Our girls are likely to be applying mostly to CSS PROFILE colleges. As I understand it, this means that while money in these accounts would not be treated as a family asset for financial aid purposes, any withdrawals would be treated as current student income and hence subject to a 50 percent financial aid "tax." If ownership of the accounts were transferred to my wife, they would instead be treated as parental assets and all funds in the accounts would be "taxed" at a rate of 5 percent each year, but disbursements from them would not be treated as income. As the accounts were drawn down over time, the remaining balance subject to this "tax" would decline, so my estimate is that cumulative financial aid for the two girls would ultimately be reduced by 15-20 percent of the total amount of the original funds in the accounts, rather than up to 50 percent if all of the funds were disbursed from accounts owned by the grandparents. In practice, it is likely that they would not qualify for need-based aid at all if their grandparents retain ownership of the accounts, but will likely qualify for some if ownership of the accounts is transferred.
My first question is this: has anyone reading this been in this situation and explored such a transfer of 529 plan accounts from grandparents to parents? Did it work out, and/or what hurdles did you encounter?
Also, since the funds for each girl are in a separate account, it seems like it might be even more advantageous to transfer the first account the year before our older girl starts college, and to hold off on transferring the second account until our younger girl is ready to go. On the other hand, even if this would not violate any rules, I can imagine that the older girl's college financial aid office might raise questions if a significant new asset appears in our reporting ahead of her fourth year of college when we had not reported it before. Has anyone been in this situation and/or know from other sources if this is likely to be a problem?
P.S. I do realize that we are fortunate to have these "problems" but would still welcome any guidance,
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