Tax consequences of liquidating 529
State-sponsored prepaid plans may only cover specified costs (tuition and/or room and board) at specified state institutions; the Independent 529 program covers tuition at colleges and universities that are members of that program.Since their introduction in 1996, assets in 529 plans have grown rapidly, particularly in 529 savings plans.Ordinarily, however, if the trust had ordinary income from other trust assets, a portion of that income would be carried out to each trust beneficiary who received a distribution from the trust during the year, regardless of which trust assets were used to make the distribution. Thus in a typical case a trust such as you describe (a "spray trust") under which the trustee can make discretionary distributions among a group of beneficiaries (e.g.
"Frontloading" is an exception to the Gift Tax limitation.
For the savings plans, qualified expenses include tuition and fees, the cost of books, supplies, and other equipment, and the cost of room and board if the designated beneficiary is at least a half-time student at an eligible educational institution.
The prepaid programs typically cover tuition and room and board.
Section 529 plans, named for the section of the tax code that provides for their favorable tax treatment, are formally called “qualified tuition programs.” These investment programs are designed to help pay for future qualified education expenses.
There are two types of 529 plans: States currently offer both of these types of plans.