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Question for the Money Doctors

Question submitted on Dec 13, 2011.

Question

I am the owner of a CESA account, my almost 20 year old son is currently listed as beneficiary, he got a very good scholarship and attended 1 year of state college and did not maintain the qualifications for the scholarship and has lost it. He is not currently in school, and based on past issues and his lack of commitment, I no longer wish to use the fund for his possible future education, his sibling is too old to transfer it to, and her children are under low income programs and if I transferred it in their names it may affect insurance assistance they are getting( they are under 5 years old). Can I cash out the CESA? I think its current value is less than original invested funds. Would there be tax liabilities or penalties? Would rolling it to a state 529 plan make things simpler? Are there any issues with Uniform Gift to Minors ?

Answer

Yes, you may close the CESA, however, the funds belong to your beneficiary.  This is an unfortunate disadvantage of CESA's in that person establishing the account loses some element of control.  If the value is less than the original investment, there will be no tax due.  Any earnings not used for qualified higher education expenses would be subject to income tax plus an additional 10% penalty.

While you can roll a CESA to a 529, this can only be done for the same beneficiary so you would still have the same issue you describe with your son.  The UGMA is a different type of account and is the beneficiary's money, depending on the state (age 18 or 21), so given your son is 20 this is not a good option either.

I suggest you check with the assistance program your daughter's children are enrolled in to find out if making them beneficiaries of the CESA would impact their eligibility for the assistance.  Most states have reduced or eliminated the impact a college savings plan has on determining assistance eligibility.  Assuming the agency says there is no impact to their assistance, assuming his sibling is over 30 years old, which is the age limit, and assuming the children of your son's sibling are "qualifying family members"  (I.e. nephew or niece), then you can change the beneficiary on the CESA.


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