You can change the beneficiary without adverse federal income tax consequences, as long as the new beneficiary is an eligible member of the family of the current beneficiary. In addition, the proposed IRS regulations provide that no federal gift tax or generation-skipping transfer tax will result, as long as the new beneficiary is of the same generation as the current beneficiary. Any change of the beneficiary to a person who is not an eligible member of the family of the current beneficiary is treated as a non-qualified withdrawal subject to applicable federal and state income taxes, as well as the additional 10% federal tax on earnings.
Eligible members of the family include the beneficiary’s:
- Natural or legally adopted children
- Parents or ancestors of parents
- Siblings or stepsiblings
- Nieces or nephews
- Aunts or uncles
- The spouse of any of the individuals listed above
- The spouse of the beneficiary
- First cousins
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