New York Advisory Opinion TSB-H-81(3)I: Does transferring a qualified higher education fund (PASS account) directly from one trustee bank to another terminate the fund under Article 22 of the Tax Law?

Plain-English summary

Charles L. Sawyer had established a "PASS account" - a qualified higher education fund under Tax Law section 612(k), created to help taxpayers save toward a dependent's college costs - and asked whether moving the account's assets directly from one trustee bank to another would terminate the fund.

Section 612(k)(4) lists several events that terminate a PASS account, including (under subsection (4)(B)) a "distribution" made other than to, or on behalf of, an eligible beneficiary for the qualifying education expenses the statute describes. The Department reasoned that a transfer of funds directly from one trustee bank to another doesn't put the money into the hands of the account's creator - it stays in trustee custody the whole time, just with a new trustee. Because the funds never come within the creator's direct control or use, the transfer isn't a "distribution" at all, and therefore can't be the kind of terminating distribution section 612(k)(4)(B) describes.

What this means for you

Parents or account creators with a PASS higher-education savings account

You can move your PASS account from one trustee bank to another (for example, to get a better rate or different services) without triggering termination, as long as the funds move directly between trustees and never pass through your own hands.

Anyone managing a PASS account who is considering a bank change

The key fact this ruling turns on is directness - the transfer must go bank-to-trustee-bank without the creator receiving or controlling the funds in between; a withdrawal followed by a redeposit could be treated very differently.

Accountants and financial advisors handling education savings vehicles

Confirm the mechanics of any proposed transfer preserve uninterrupted trustee custody of the funds before advising a client that a bank switch is safe from a termination standpoint.

Common questions

Q: Does switching the trustee bank on a PASS account trigger tax consequences?
A: Not under this ruling - a direct trustee-to-trustee transfer isn't a "distribution" and doesn't terminate the account, so long as the creator never gains direct control of the funds during the switch.

Q: What would count as a terminating "distribution" from a PASS account?
A: A payment made other than to, or on behalf of, an eligible beneficiary for the qualifying education expenses described in section 612(k) - for example, money paid out to the creator rather than kept for the beneficiary's education.

Q: Does this ruling cover withdrawing funds and redepositing them at a new bank myself?
A: No - the ruling addresses only a direct transfer between trustee banks; it doesn't address a scenario where the creator personally receives the funds in between.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/h81_3i.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-81-(3)-I
Income Tax
March 6, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I810112B

On January 12, 1981, a Petition for Advisory Opinion was received from
Charles L. Sawyer, 53 Colvin Avenue, Hamburg, New York 14075.
The issue raised is whether a qualified higher education fund, known as a
PASS account, established by the taxpayer under Article 22 of the Tax Law will
terminate if the assets of the fund are transferred directly from one trustee
bank to another.
Section 612(k) of the Tax Law provides for the creation of qualified higher
education funds designed to assist taxpayers in accumulating savings to be used
to finance the higher education of their dependents. Section 6l2(k)(4) sets forth
various occurrences which will result in the termination of such a fund. One of
these is where "...a distribution is made by the fund other than to, or on behalf
of, an eligible beneficiary..." for the payment of qualifying educational
expenses described in the statute. Tax Law, §612(k)(4)(B).
A transfer of funds directly from one trustee bank to another does not
result in the funds being paid to the creator of the Pass account. In the absence
of such payment, a transfer of funds from one trustee bank to another trustee
bank does not constitute a "distribution," because the funds do not come within
the direct control and use of the creator of the fund. Consequently, such
transfer does not constitute a terminating condition within the meaning and
intent of section 612(k)(4)(B) of the Tax Law.

DATED: March 4,1981

TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR