529 plans, or Qualified Tuition Programs as the federal government calls them, are specialized investment accounts to give tax-advantaged savings for education expenses. 529 plans are typically the best vehicle to save for education expenses.

When a 529 plan is set up, there are two important people associated with the account. The first is the account owner and the second is the beneficiary.

Surprisingly, the account owner can change the beneficiary at will, normally with a bit of paperwork. This change is a tax-free rollover if the receiving account is for another designated beneficiary under a qualified tuition program who is a member of the family of the original designated beneficiary. In this way, you can transfer 529 funds from one family member to another.

Under these rules, we recently were posed the question:

Does a foster child or a child being cared for under a court judgment, court decree, or conservatorship qualify as a related family member for the purpose of a qualified 529 plan rollover?

The short answer is:

Many children being cared for under court decree do count as family members for the purpose of a 529 plan rollover because they have an “eligible foster child” relationship.

Here’s the longer answer:

For the purposes of this section, family is defined by 529(e)(2) as follows:

(2) Member of family

The term “member of the family” means, with respect to any designated beneficiary—
(A) the spouse of such beneficiary;
(B) an individual who bears a relationship to such beneficiary which is described in subparagraphs (A) through (G) of section 152(d)(2);
(C) the spouse of any individual described in subparagraph (B); and
(D) any first cousin of such beneficiary.

Section (2)(B) references 152(d)(2) A through G, which is the tax code which defines the word “dependent.” That section reads:

(A) A child or a descendant of a child.
(B) A brother, sister, stepbrother, or stepsister.
(C) The father or mother, or an ancestor of either.
(D) A stepfather or stepmother.
(E) A son or daughter of a brother or sister of the taxpayer.
(F) A brother or sister of the father or mother of the taxpayer.
(G) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

And in IRC 152, the word child is defined in 152(f)(1) as:

(1) Child defined
(A) In general

The term “child” means an individual who is—
(i) a son, daughter, stepson, or stepdaughter of the taxpayer, or
(ii) an eligible foster child of the taxpayer.
(B) Adopted child

In determining whether any of the relationships specified in subparagraph (A)(i) or paragraph (4) exists, a legally adopted individual of the taxpayer, or an individual who is lawfully placed with the taxpayer for legal adoption by the taxpayer, shall be treated as a child of such individual by blood.
(C) Eligible foster child

For purposes of subparagraph (A)(ii), the term “eligible foster child” means an individual who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

In this way, both legally adopted children and stepchildren are treated the same as a blood relative.

Additionally, children who are “placed with the taxpayer” through “an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction” count as a child for the purposes of both the dependent definitions of a qualifying relative and, by proxy, the 529 plan definitions of family.

But how can you know that your court document counts under this “eligible foster child” clause? As with many matters in the 529 plan legislation, that is between you and your tax preparer. Currently, I am not able to locate any additional guidance on which types of documents qualify.

However, if your tax preparer has already decided to count the child as a qualifying child for the purposes of the child tax credit, then, by way of the same definition, they could qualify as a family member for the purposes of a nontaxable 529 plan rollover.

Photo by Natali Hordiiuk on Unsplash. Image has been cropped.