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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?
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    I personally would reveal the accounts the year before AKA beginning of their junior year of high school. The money could change where they decide to go to college and/or their financial aid packages.
    – mkennedy
    Dec 26, 2018 at 22:23
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    WARNING -- Giving your niece & nephew "money for college" will mean they have money which will mean they will get less financial aid. Check this out thoroughly before going ahead. (Expanding on mkennedy's answer.)
    – Jennifer
    Dec 27, 2018 at 5:48
  • Thanks for the tip Jennifer, I had forgotten about that.
    – Lil' Bits
    Dec 27, 2018 at 12:10
  • Would you welcome an answer discussing whether this is a good idea or not (the idea of surprising them with this), or are you solely looking for if it is possible?
    – Joe
    Dec 27, 2018 at 17:58
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    @Daniel: It won't affect financial aid in the first year (because it's neither parental nor student assets), but when it's drawn upon, it will count as student income, which is the single most heavily penalized thing in financial aid calculations. So if they're likely to get financial aid, you'll lose a lot of it if they draw on the 529 before the final year of college. Basically, 529s opened by non-parents are for the final year of college only, or for kids who were never getting financial aid anyway.
    – ShadowRanger
    Dec 28, 2018 at 14:50

4 Answers 4

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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.

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    I would hesitate to describe obtaining the SSN of minors without the consent of their legal guardians "great." The correct answer is to start the plan under OP's name and transfer when it comes time to reveal the surprise.
    – wnnmaw
    Dec 27, 2018 at 19:53
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    @wnnmaw I'm not suggesting obtaining their SSNs without permission from the parents. I'm suggesting obtaining them with permission from the parents, but without tipping them off about what it's for.
    – Daniel
    Dec 27, 2018 at 23:54
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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.

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    Be aware there may be gift tax implications if one starts with the beneficiary as one's self and then transfers to a niece and nephew.
    – Morrison Chang
    Dec 27, 2018 at 3:29
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    Niece and nephews count as qualified family members, but at least for New York State Direct Plan Section 7, page 35 of the agreement, If you change your Beneficiary or transfer money to an Account for another Beneficiary, you may be subject to gift tax if the new Beneficiary is: • Of a younger generation than your Beneficiary being replaced; or • Not a Member of the Family of the current Beneficiary. So if the adult Uncle/Aunt is the both owner and the beneficiary there appears to be gift tax issues to be managed.
    – Morrison Chang
    Dec 27, 2018 at 4:29
  • @HartCO if there were no tax implications on the transfer of a 529 plan, very rich people would use it instead of paying gift taxes. It would be a loophole.
    – Mindwin Remember Monica
    Dec 27, 2018 at 11:33
  • @MorrisonChang Generation-skipping rules do not apply unless the new benificiary is two or more generations below the old beneficiary. So from self to niece would have no tax implications.
    – Hart CO
    Dec 27, 2018 at 15:10
  • @Mindwin It's not a loophole, it is intended. It's also not that exciting since there are maximum contribution limits, limits to how the funds can be used, and limited to family-members no more than 1 generation apart.
    – Hart CO
    Dec 27, 2018 at 16:01
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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.

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    Note: I don't normally post answers that argue with the premise of the question, but in comments OP said they'd welcome comments about whether it's a good idea, so, here it is.
    – Joe
    Dec 27, 2018 at 22:25
  • I have set up a 529 plan for a niece. I agree with @Joe: you can surprise her parents today with the gift. Then you can surprise the college-bound person again in eighteen years. In the meantime they can plan. You can also potentially save the parents and child big hassles: what if, heaven forbid, you die in the meantime? By the way, Utah's 529 plan uses high-quality low-fee index funds and they we lcome accounts from outside Utah.
    – O. Jones
    Dec 28, 2018 at 12:03
  • +1, over and over again, for the second and third paragraphs.
    – Pete Becker
    Dec 28, 2018 at 13:54
  • @Joe these are good points, thanks for addressing them. For the last paragraph, that is exactly what I thought, so I will not be doing that. I'll have to think about when it is appropriate to tell my sister about the fund.
    – Lil' Bits
    Dec 28, 2018 at 16:20
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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!

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