Assume that any distribution the designated beneficiary receives from a Coverdell
ESA is a gift, unless there is evidence to the contrary (e.g., there is an allegation
that contributions to the account are mandated by a court). Distributions that meet
the definition of a gift and are used for educational expenses of the designated beneficiary
are excluded as income in the month of receipt.
If an excluded distribution is retained into the month following the month of receipt,
it is an excluded resource of the designated beneficiary for 9 months beginning with
the month after the month of receipt. Any funds retained after the 9-month exclusion
period are countable resources of the designated beneficiary beginning with the month
following the end of the 9-month exclusion period. For information on educational
gifts, see SI 00830.455 and SI 01130.455.
If the designated beneficiary spends any portion of a Coverdell ESA distribution for
a purpose other than their educational expenses or no longer intends to use the funds
for their educational expenses, the non-educational portion of the funds is income
at the earlier of two points:
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in the months the funds are spent; or
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in the month the individual no longer intends to use the funds for educational expenses.
If a countable distribution is retained into the month following the month of receipt,
it is a countable resource of the designated beneficiary.
EXAMPLE 1: Distribution excluded as income and resources
A disabled adult, age 19, is the designated special needs beneficiary of a Coverdell
ESA with a balance of $1,200 as of the first of the month. The disabled adult’s grandfather
contributes to the account. On August 15, the individual receives $800 from the account.
The disabled adult spends $600 on student activity fees and stationary supplies in
August. As of September 1, $200 of the distribution remains. The disabled adult tells
the field office (FO) that they will use the rest of the money for future educational
expenses. The FO determines:
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The Coverdell ESA is an excluded resource of the disabled adult.
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The distribution meets the definition of a gift for educational purposes and is excluded
from income in the month of August.
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The remaining amount of $200 is excluded from resources for the months of September
through May. As of June 1, any portion that remains is a countable resource of the
disabled adult.
EXAMPLE 2: Distributions counted as income and resources
A disabled child is the designated beneficiary of a Coverdell ESA with a balance of
$700 as of the first of the month. The disabled child’s aunt and uncle contribute
to the account. On September 30, the child’s parent, who acts as an agent on behalf
of the child, receives $150 from the account. The child’s parent spends $80 on a non-educational
software game for the child. As of October 1, $70 of the distribution remains. The
child’s parent tells the FO that they intend to spend the rest of the money during
an upcoming vacation. The FO determines:
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The Coverdell ESA is an excluded resource of the disabled child.
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The distribution of $150 is countable income to the child for the month of September
because $80 was spent on non-educational expenses and $70 is intended for non-educational
expenses. As of October 1, the $70 that remains is a countable resource of the disabled
child.