[W]hy doesn't every well-off individual fully utilize his or her annual [gift] exclusions? No doubt it's because most people don't like the idea of giving away their hard-earned dollars. To be eligible for the gift-tax annual exclusion, the gift must be irrevocable, and it must be made without any strings attached (except for what your attorney may be able to craft through a trust or family partnership). What's yours now no longer belongs to you, and that can be a tough pill to swallow.
Unless, of course, we're talking about a 529 plan.
With a 529, you have the right to change the beneficiary to another family member, direct the use of distributions, and even ask for the money back at any time (subject to tax and 10 percent penalty on the earnings). Yet your contributions to the 529 plan are treated as gifts from you to the account beneficiary, and those gifts qualify for the $13,000 annual exclusion. It's quite extraordinary.
"Quite extraordinary" indeed. The history of the gift tax is the history of devices designed to let you give something away (for tax purposes) without, you know, really giving it away. The 529 rule seems to come as close as you can get to abolishing that distinction. Yep, you have that 10 percent penalty, but it is on earnings only, not principle. Not much of a constraint against later second thoughts.
Update: Earlier I said "Roth IRA." Actually, Roth-type IRAs are far less disruptive than ordinary old fashioned IRAs. But they're still a lousy way to do public business.