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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.

Tax-Advantaged Vehicles

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 certain advantages.

  • 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 School, which explains the financial aid process, is available at www.CollegeCostsHowMuch.com. You can send him an e-mail at Harold@edinv.com.




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