1099-Q - two questions

[bgiez]

Client comes in with 1099-Q showing:
-client name/FBO grandchild
-QTP
-Recipient not designated beneficiary
-distribution $19,000, earnings $1100. basis $17,900

Client says she wrote check to grandchild's parents who then paid grandchild's education expenses. Client "is sure" that grandchild's parents kept good records and only paid qualified education expenses with the money.

First question: Is this considered qualified distribution? I question because client did not pay the expenses directly, nor did she write the check to the grandchild, but rather to the grandchild's parents.

Second question: Client says the QTP was set up years ago by her with $50,000 contribution. Should a gift tax return have been filed at that time, or is one required with this distribution?

Thanks for any input.

[scottax]

Three good questions, three hunches: no, no, and yes.

Seeing in Pub 970 how the IRS treats education expenses paid by others (p.22), I believe that the payment must be directly to the institution from the grandparent. Failing that, the grandparent has indeed not satisfied the conditions for paying qualified ed expenses.

At the time of opening the QTP/529 savings account the grandparent retained ownership of the monies, therefore no gift was given...until now with writing a check to the parents.

[ChEAr$]

Agree

Three good questions, three hunches: no, no, and yes.

Seeing in Pub 970 how the IRS treats education expenses paid by others (p.22), I believe that the payment must be directly to the institution from the grandparent. Failing that, the grandparent has indeed not satisfied the conditions for paying qualified ed expenses.

At the time of opening the QTP/529 savings account the grandparent retained ownership of the monies, therefore no gift was given...until now with writing a check to the parents.

with Scott. On the bright side of course is fact that only the interest will be taxable.
Oh, and subject to the 10% penalty as I found out with a recent new client.

[scottax]

as Chears points out, the tax hit on the grandparents will be small to none:

1) given the $12,000 per person gift tax exemption, the grandparents have no tax liability for the $19,000 gift to the parents (two recipients)

2) re the $1100 taxable earnings, the exposure here is maybe 35% (25% tax bracket plus the 10% penalty) or $385. Then the grateful parents (recipients of the $19,000 largess) would be happy to reimburse the grandparents the $385 loss with part of the (up to) $2000 LifeTime Learning credit that the parents can get (if the grandchild is being claimed and the qualified education expenses are there)