Grandparents Can Help!
By Harold Simansky
Educational Investment Advisor
As college costs keep rising, it's a lucky family that can count on a grandparent or two
to help shoulder those bills. Actually, this multi-generational sharing of responsibility
is happening more and more these days - and quite naturally a lot of questions are popping
up about how to go about it the right way. For that reason, this article is devoted to
sorting through the different options – with an eye to finding one that's advantageous for
you, your kids and their grandparents.
Funding a child's education is likely to be the best gift you can give as a grandparent.
Like parents, you should look into all the savings options - though with a number of
additional goals in mind as well, such as estate-planning implications. Grandparents
also will probably have more than one branch of future college students in the family
to think about - and each of their situations will be different, depending on the
finances of their parents and their other grandparents.
Paying the Bill
The easiest way to help out is simply to send a check directly to the educational
institution (whether college or primary/elementary school). With this method, you
can provide assistance immediately, and there's no chance the money will be used
for anything other than education. Student and parents never see the cash.
There are other advantages. This kind of direct contribution is not subject to
the annual gift tax exclusion, which is currently $12,000 per year per person.
Whether the tuition is $1,000 a year or $100,000, you won't have to pay a gift
tax on this amount. In fact, even if you pay a student's tuition you are still
free to give him or her a tax-free gift up to the $12,000 limit. The gift tax
exclusion is only for payments of tuition and not room, board or other education expenses.
Further good news is that the direct tuition contribution made by a grandparent
will have little or no effect on the level of financial aid a student receives.
The key disadvantage is that a grandparent won't enjoy any tax savings through this
kind of contribution. Until you send off that tuition check, the money remains in
your estate and you might end up paying capital gains tax and income tax on it.
Because of the above reasons, some people may find the best choice lies with one
of the tax-advantaged investment accounts we discussed in detail in previous
articles. As a grandparent, you can use any of these vehicles, and each has
A Coverdell Education Savings Account established by a grandparent
can be used to fund private primary/secondary school.
A grandparent-funded UGMA/UTMA can be used for education and
non-education expenses while providing some tax savings.
Grandparent-owned taxable accounts can be used for anything.
These accounts, however, raise a whole new set of questions and issues to
ponder. Such as: "What if I really want that money later on for travel or
as a reserve for medical expenses? What if my grandchild doesn't go to college
and ends up using my money to pay for a BMW? Am I just going to be harming my
grandchild's financial aid package? Can I really afford to give away all this money?"
529 Savings Plans
This is where a 529 Savings Plan can come to the rescue. 529 plans are a great
tool for a lot of parents, but they're an especially attractive and friendly
option for grandparents.
Instead of giving up all control of the money, which occurs with a gift to an
UGMA/UTMA account, the grandparent - as a 529 account owner – continues to have
the power to decide when withdrawals are made and for what purpose. Funds can
be transferred to benefit a different family member or can simply be taken back,
for a modest penalty. Further, you can move a large sum of money out of your
estate very quickly while exerting a high level of control.
Unlike with UGMA/UTMA, the student won't take a large financial aid hit if the
grandparent has set up a 529 Plan. In fact, of all the plans we have discussed,
under current rules a grandparent-owned 529 Savings Plan will result in the
least financial aid impact, having little or no effect on the overall package.
While no savings plan is right for everyone, 529 Savings Plans will likely make
sense for a lot of grandparents. And if not a 529 Savings Plan, maybe just paying
the bill will work best for your family. Whatever your situation, there are options
available to make the gift of education easier for grandparents to give.
Article #6 -
The Ins and Outs of 529 Plans
About the Author
Harold Simansky is the founder of Educational Investments, LLC, (www.educationalinvestments.com
a Registered Investment Advisory firm focused on helping families save for
education. His book, College Costs How Much?! The Workbook to Help You Save for
, which explains the financial aid process, is available at
. You can send
him an e-mail at Harold@edinv.com