Title 44
Taxation

Chapter 30
Personal Income Tax

Part II
Residents

§ 44-30-25. Modification relating to family education accounts.

(a) “Family education account” means an account created by an individual taxpayer for the purpose of providing qualified educational benefits to a qualified beneficiary, but only if the account is created by a written governing instrument as prescribed by the tax administrator that designates the account as a Rhode Island family education account and that meets the following requirements:

(1) The depositary is a qualified depositary.

(2) The assets of the account will not be commingled with other property except in a common trust fund or common investment fund.

(3) The account balance deemed to be distributed to the taxpayer not later than the last day of any taxable year of the taxpayer unless the beneficiary remained qualified with respect to the taxpayer on at least one day during such year.

(4) In the case of an account having a qualified beneficiary described in subdivision (b)(1) of this section, no contributions to the account may be made after the taxpayer has attained age twenty-one (21), and in the case of an account having a qualified beneficiary described in subdivision (b)(2) of this section, no contribution may be made to the account unless the beneficiary is a dependent of the taxpayer.

(b) “Qualified beneficiary” means an individual designated by name or class in the instrument creating the account who is:

(1) The taxpayer; or

(2) A dependent of the taxpayer as defined in 26 U.S.C. § 152. In the case of an individual whose parents are divorced and who is a dependent of one of the parents, the individual shall be treated as the qualified beneficiary of each parent. No person shall be a qualified beneficiary after obtaining a bachelor’s degree, any degree equivalent thereto, or any more advanced degree.

(c) “Qualified depositary” means:

(1) Any national bank, federal savings and loan association, federal savings bank, federal insured credit union, or other institution chartered by the United States of America authorized to accept deposits which has its principal business office in the state of Rhode Island;

(2) Any institution incorporated under the laws of the state of Rhode Island authorized to accept insured deposits; and

(3) Any other person who demonstrates to the satisfaction of the tax administrator that it will administer the account in a manner consistent with the requirements of this section and who submits to the jurisdiction of this state for the purposes of enforcing these requirements.

(d)(1) “Qualified educational benefits” means post-secondary education provided by an educational institution which by virtue of law or charter is a public or other nonprofit educational institution empowered to provide a program of education beyond the high school level and which is accredited by a nationally recognized educational accrediting agency or association and awards an associate’s, a bachelor’s or advanced degree or provides a program of not less than two (2) years’ duration which is acceptable for full credit toward a bachelor’s degree.

(2) For the purposes of this section, the cost to provide qualified educational benefits means applicable tuition and fees, room and board charges not in excess of the median amounts charged by the institution providing the qualified educational benefits to students living in institution-provided housing, and fees, books, supplies, and equipment required for courses of instruction at the institution.

(e) “Qualified withdrawal” means any withdrawal from a family education account:

(1) The amount of which does not exceed the amount of the cost paid during the taxable year to provide qualified educational benefits to one or more qualified beneficiaries; or

(2) Occurring within sixty (60) days after the death of any qualified beneficiary if there is no qualified beneficiary younger than the decedent at the time of his or her death;

(3) To purchase tax exempt bonds issued by the state of Rhode Island having a maturity of not more than twenty (20) years from the date of purchase;

(4) Which transfers the entire balance of a particular family education account from one qualified depository to another; or

(5) Which transfers all or a portion of the balance of a particular family education account from an account in the name of one qualified or unqualified beneficiary to an account in the name of another qualified beneficiary of the same taxpayer.

(f) Income, including gains and losses, on a qualified family education account shall be exempt from taxation under this chapter, but the assets thereof shall be deemed a part of the estate of the taxpayer for purposes of chapter 22 of this title.

(g)(1) Except as provided in this subsection, any amount withdrawn or deemed to be withdrawn from a family education account other than as a qualified withdrawal shall be a modification increasing federal adjusted gross income of the taxpayer in the year of the nonqualified withdrawal, but the amount of the modification shall not exceed the net modifications reducing the taxpayer’s federal adjusted gross income pursuant to this section for prior years plus any modification pursuant to subsection (f) of this section for the year of the nonqualified withdrawal. If any amount shall not be distributed as required by subdivision (a)(3) of this section, the amount required to be distributed shall nevertheless be taken into account as a withdrawal in the year the amount was required to be distributed. If a non-qualified withdrawal shall be made from a family education account at a time when the taxpayer is not a resident of Rhode Island, the portion of the modification deemed to be Rhode Island source income shall be the amount of the modification multiplied by a fraction the numerator of which shall be the number of taxable years during which the taxpayer maintained the account and was a resident of Rhode Island and the denominator of which shall be the number of years the taxpayer maintained the account.

(2)(i) Any portion of a family education account used in a prohibited transaction shall be deemed to be withdrawn on the date the portion is so used. The term “prohibited transaction” means any transaction which would be described in 26 U.S.C. § 4975(c)(1)(A), (B), (C), or (D) if the term “plan” as used in that section included a family education account. For purposes of applying 26 U.S.C. § 4975(c)(1) to this section, the term “disqualified person” as used in that section has the meaning set forth in 26 U.S.C. § 4975(e)(2) disregarding, subparagraphs (A) and (B) of that paragraph.

(ii) If any portion of the account shall be invested in any “collectible” as defined in 26 U.S.C. § 408(m)(2), the collectible shall be deemed withdrawn on the first day that any disqualified person shall obtain physical possession of the collectible.

(h) Upon the death of the taxpayer creating a family education account, the account shall not terminate unless otherwise provided by the instrument creating the account and the person entitled to the residue of the family education account, as provided in the instrument creating the account, or if not so provided, as provided in the taxpayer’s will or as otherwise provided by law, shall succeed to the rights and obligations of the taxpayer hereunder, but no person other than a posthumous child of the taxpayer delivered alive within eleven (11) months from the date of death shall become a qualified beneficiary after the date of the taxpayer’s death. Any individual who was a qualified beneficiary with respect to the deceased taxpayer shall continue as a qualified beneficiary until any time that the individual would have ceased to be a qualified beneficiary with respect to the taxpayer if: (1) the taxpayer had continued to live; (2) the taxpayer had continued to provide the individual with the same level of support, adjusted for inflation in the same manner as is described in 26 U.S.C. § 1(f), as the taxpayer provided to the individual in the last taxable year ending before the taxpayer’s date of death; and (3) the individual had continued to have as his or her principal place of abode the taxpayer’s home and had remained a member of the taxpayer’s household; provided, that the individual had the taxpayer’s home as his or her principal place of abode and was a member of the taxpayer’s household at all times during the period beginning on the first day of the taxpayer’s last taxable year ending before the taxpayer’s date of death and ending on the taxpayer’s date of death.

(i) Every taxpayer establishing a family education account shall file the returns and provide statements with respect to that account as the tax administrator may require. Every taxpayer claiming a modification by reason of subsection (f) of this section shall file information as the tax administrator may require. The information shall be filed for each year until all amounts in all family education accounts created by the taxpayer have been withdrawn or distributed.

(j) Amounts contributed to a family education account and income earned on that account shall not be subject to involuntary alienation or assignment by the taxpayer and shall be exempt from levy and attachment with respect to debts of the taxpayer except that this subsection shall not operate to bar any assignment, alienation, attachment or levy:

(1) Arising out of a bankruptcy suit instituted with respect to the taxpayer;

(2) To pay a debt owing to the United States of America;

(3) To pay expenses of providing qualified educational benefits to a qualified beneficiary whom the taxpayer has a legal obligation to support;

(4) To pay child support; or

(5) To pay any other debt to the extent the taxpayer has made contributions while insolvent.