|Question: I'd like to make a lump-sum contribution to my grandchild's 529 account. Will I owe gift tax?|
That depends on a few things, including the amount of your lump-sum contribution and the extent to which you've used your gift tax applicable exclusion amount of $1 million.
All contributions to 529 plans are considered present interest gifts that qualify for the $13,000 (2010 figure) annual federal gift tax exclusion. So, a gift of $13,000 or less to your grandchild's 529 account will not cause a gift tax. A contribution of $13,000 or less to your grandchild's 529 account is also excluded for purposes of the generation-skipping transfer tax (GSTT).
If your total yearly contribution to the 529 plan exceeds $13,000, you can elect to treat your contribution (up to $65,000 in 2010) as if made evenly over a five-year period to avoid federal gift tax. You make this election on your federal gift tax return (which you must file if your gift is over $13,000). Any amount over $13,000 in a year to the same beneficiary is a taxable gift. Keep in mind that you must use up your lifetime credit before any gift tax is actually paid.
You'll also need to investigate the gift tax rules of your state, since state tax treatment can differ.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.