Originally published on Forbes.com.
One provision of the House Tax Cuts And Jobs Bill has pro-choice advocates concerned that a pro-life camel might be sticking its nose under the reproductive rights tent. If they are right, that would be a violation of Reilly’s First Law of Tax Policy – Make tax policy the Switzerland of the culture war.
The cause for concern is one of the more insignificant tax provisions contained in Section 1202 – Consolidation of education savings rule. It expands the definition of “designated beneficiary” for Section 529
The provision provides that an unborn child may be treated as a designated beneficiary or an individual under section 529 plans. An unborn child means a child in utero. A child in utero means a member of the species homo sapiens, at any stage of development, who is carried in the womb.
I suspect that in order to avoid IRS having to make way too intimate inquires there will need to be some sort of safe harbor to the effect that a child born say before September 30th will be presumed to have been in the womb on December 31 of the prior year. It is interesting to note that frozen embryos will not be considered designated beneficiaries under the rule.
The current definition indicates that a designated beneficiary is an “individual”. Interestingly, the term “individual” which occurs in the Code 535 times is not defined in the Code. The Tenth Circuit noting this in Johnson v Comm in 2003 went with Webster which defines individual as:
A human being regarded separately from a group or from society.
Some Excited Reaction
Scott Bixby’s piece in the Daily Beast alerted me to this provision, which I might not have picked up on as I read the bill. I’m not that big of a 529 fan and this was not a big revenue item one way or the other. In The Five Most Outrageous Things Buried in the GOP’s Tax Bill, he wrote:
Some children, however, would benefit under Republican legislation—they just haven’t been born yet. The bill allows parents to create 529s, or qualified tuition plans, for beneficiaries the bill calls “unborn children.”
Tara Golshan of Vox is more explicit with Republicans’ tax bill is sneakily hacking away at abortion rights.
Buried in Republicans’ tax bill, in a provision about college savings accounts, is a pro-life political statement — one that doesn’t make much change to the tax law, and instead helps the right build a case against abortion. …..
Abortion rights advocacy groups have flagged the provision as a likely anti-abortion political statement, and one that could help Republicans build a case toward redefining how the law defines a person — a crucial part of the abortion debate in the United States.
There is more. NARAL a pro-choice group is all over it announcing a campaign to swing house members on the issue.
This is the first time “personhood” language has made it into the tax code, leaving the door open for future laws to use the same, ideological definition of when life begins. As shown in recent ballot measures across multiple states, the public largely does not support the concept of personhood–in red, purple, and blue states–and this attack on reproductive rights is out of step with legal precedent, science, and public opinion.
From My Crowd
I have a pretty good amount of ideological diversity among my facebook friends so I decided to reach out to them using this piece by Richard Reeves and Katherine Guyot for bait (or maybe bate).
Giving a fetus legal status in the tax code would be an extraordinary and unprecedented move. Leaving aside some tricky questions on implementation (what date could a 529 be established?), what matters here are the broader implications of giving fetuses this new official status. There is clearly a much deeper motive behind this proposal than a merely technocratic change one small part of the tax code.
I got three comments, My friend who is passionately pro-life was a bit snarky about it.
With the cost of college going up, lets you start earlier. 6 months with compounding may be the difference between in state or out of state.
The pro-choice comments were much more passionate.
It would embed in law that a blob of protoplasm is a person—thus an attack on a woman’s right to terminate a pregnancy at any stage.
They’re trying to lay the foundation for the idea that a blastocyst has the same legal rights as a born human.
How New Is This?
Purely as a tax nerd there was one question that nagged at me. What about gift tax? If I had bothered to go into the Code I would have realized that it was already addressed. Section 529 provides that any contribution on behalf of a designated beneficiary qualifies as a gift of a present interest. Rather than check the Code last week, I reached out to my estate planning brain trust. (Members of my various brain trusts don’t actually know that that is what I consider them). The question I put out was:
If money goes to a 529 plan with an unborn child as the designated beneficiary, does it qualify as a gift of a present interest?
Matthew Erskine, who has a boutique estate practice focusing on unique assets, got back to me with a great answer referring to Mary Dupont Faulkner a 1940 Board of Tax Appeals decision (41 BTA 875).
A gift to an unborn child is considered a present gift and not a future gift. Here is a tax court decision from 1940 on point.
The term “life in being” is part of the Rule Against Perpetuities originally and has to do with the maximum term of a trust under common law. If the child is ventre sa mere (or in utero) at the time of the gift, then the child is “in being”. As Lord Chief Justice Willis (you remember him don’t you?) said:
“ An infant en ventre sa mere, or in the mother’s womb, is supposed in law to be born, for many purposes. It is capable of having a legacy, or a surrender of a copyhold estate, made to it. It may have a guardian assigned to it, and it is enabled to have an estate limited to its use, and to take afterwards by such limitation, as if it were then actually born. And in this point the civil law agrees with ours.”
The rule against perpetuities goes back to 1682, so this is not a new thing.
Still, it is an odd provision and there are enough problems in getting good tax legislation in place that it might be smart for the Republicans to just let this one go and fight that battle elsewhere.
Other Coverage
Brian Boswell of forbes.com likes the provision while noting some of the complications.
From an administrative perspective, however, this might be a challenge, as most plans require the beneficiary to have a tax ID to tie to the account. At a minimum, the beneficiary needs a name. But what if the gender is not yet specified or the parents have not selected a name for the child? The plan administrators will have to sort this one out, but it’s a win for 529 stakeholders. Parents have more time to sit and think about college savings before the child is born. It opens new marketing opportunities for providers, increases the timeline – if slightly – for the savings to grow, and opens new gift-giving possibilities.