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Can Grandparents Help A Grandchild With College Costs

Aug 30, 2019

As the expense of a college education continues to climb up, numerous grandparents are jumping in
to assist. It is expected to accelerate as baby boomers, a lot of whom went to college, end up being grandparents and start gifting what's forecasted to be trillions of dollars over the coming years.

Contributing to a grandchild's college education can bring great personal satisfaction and is a wise method for grandparents to address their estate planning without having to pay present and future taxes. Are there easy ways to accomplish this objective?

Outright money presents


A common way for grandparents to assist grandchildren with college costs is to make an outright present of cash or securities. This method has a couple of disadvantages. A gift of more than the yearly federal gift tax exemption amount-- $14,000 for private donations and $28,000 for contributions made by a couple-- might have present tax and generation-skipping transfer (GST) tax repercussions (GST tax is an extra present tax troubled presents made to somebody that is at least one generation before you).

A problem with this is that a cash gift to a student will be thought-about as untaxed income by the federal government's help application, the FAFSA, and student income is assessed at a rate of 50 percent, which can affect financial aid eligibility.





One workaround is for the grandparents to provide the cash gift to the parents instead of the
grandchildren, since presents to parents, are not required to be reported as income on the FAFSA.
Another idea is to wait until your grandchild graduates college and then give a money present that can be utilized to pay off school loans. Another choice is to pay the college directly.

Pay tuition straight to the School


According to federal law, tuition payments made directly to a college aren't thought about as taxable
presents, no matter how big the amount. Grandparents don't have to stress about the
$ 14,000 annual federal gift tax exemption. Paying for tuition is good - room and board, books, fees, equipment, and other comparable expenditures don't certify.

Aside from the apparent tax advantage, paying tuition straight to the college guarantees that your cash goes to places you planned, plus it gets rid of the money from your estate. And you are still free to provide your grandchild a separate tax-free present each year as much as the $14,000 limit ($ 28,000 for joint gifts).

Colleges will frequently deduct a student's college tuition help by the amount of the grandparent's payment. So before sending out a check, ask the college how it will affect your grandchild's eligibility for college-based aid. If your contribution adversely affects your grandchild's student aid, especially the grant or scholarship part, consider paying off your grandchild's student loans after graduation to help him instead.

529 plans.


A 529 plan can be an excellent method for grandparents to add to a grandchild's college education, while at the same time paring down their own estate. Contributions to a 529 plan grow tax-deferred, and withdrawals used for the beneficiary's qualified education expenditures are entirely tax-free at the federal level (and usually at the state level too).

There are 2 types of 529 plans: college savings strategies and prepaid tuition plans. College savings strategies are specific investment-type accounts used by nearly all states and handled by professionals. These funds can be used at any college in the United States or abroad. Prepaid tuition strategies allow prepayment of tuition at today's prices for the colleges that participate in the plan.

Read More: Will the New Federal Tax Laws Effect College Education Loans?

Grandparents can open a 529 account and call a grandchild as the recipient (only one individual can be listed as an owner,) additionally they can add to a currently active 529 account. The grandparents can contribute money to a grandchild's 529 accounts, or they can add smaller regular deposits.

Thinking about a lump-sum gift, a significant benefit of 529 plans is that under unique guidelines special to 529 plans, people can make a single lump-sum contribution to a 529 plan of approximately $60,000 ($ 120,000 for joint gifts by couples) and avoid federal gift tax. To do so, a special election needs to be made to deal with the gift as if it were made in equivalent installations over five years, and no additional additions can be made to the beneficiary throughout the time frame. Example: Mr. and Mrs. Jones can make a lump-sum contribution of $140,000 to their grandchild's 529 plan in Year 1, choosing to treat the present as if it were made over 5 years.




The result is they are thought to have actually made yearly gifts of $30,000 ($ 15,000 each) in Years 1 through 5 ($ 120,000/ 5 years). Because the quantity gifted by each grandparent is within the annual gift tax exemption, the grandparents will not owe any present tax (presuming they do not make any other presents to this grandchild throughout the five-year duration). In Year 6, another lump-sum contribution can be made and then repeat the process. In Year 11, they can do so once again.

Considerably, this cash is considered eliminated from the grandparents' estate, even with a grandparent created 529 accounts the grandparent is still in control of the funds. There is a caveat, however. If a grandparent were to pass away during the five years, then a partial part of the gift would be "recaptured" into the estate for estate tax functions.

Example: In the previous case, if the grandparent were to die in Year two, his overall Year one and two contributions ($ 28,000) would be left out from his estate. But staying part attributed to him in Years 3, four, and 5 ($ 42,000) would be included in his estate. The contributions credited to the grandparents ($ 14,000 annually) would not be regained into the estate. If the grandparents want to open a 529 for their grandchild, there are a couple of things to bear in mind. If you want to withdraw the cash in the 529 Plan for something besides your grandchild's college expenses-- for example, for medical costs or emergency functions-- there is a double effect: the portion of the income of the withdrawal undergoes a 10 percent penalty and will be taxed at your standard earnings tax rate. Funds in a grandparent-owned 529 account might still be factored in when identifying Medicaid eligibility unless these funds are excused explicitly by state law. Relating to financial aid, grandparent-owned 529 accounts are not required to be noted as a property on the government's financial aid application, the FAFSA.

Nevertheless, withdrawals from a grandparent-owned 529 plan are reported as untaxed earnings to the recipient (grandchild), and these earnings are evaluated at 50 percent in the FAFSA. By comparison, parent-owned 529 accounts are reported as moms and dad possession on the FAFSA (and assessed at 5.6 percent), and money from parent-owned strategies aren't counted as student income. To prevent having the distribution from a grandparent-owned 529 account count as student earnings, one choice is for the grandparent to postpone taking a withdrawal from the 529 plan up until whenever after the 1st of the grandchild's junior year of college (since there will be no more FAFSAs to submit). Another idea is for the grandparent to change the owner of the 529 accounts to the parents.

Read More: What Is FASFA and Should You Fill Out an Application?

Colleges deal with 529 plans differently for purposes of dispersing their own financial assistance. Usually, parent-owned and grandparent-owned 529 accounts are treated similarly because colleges simply require a student to note all 529 plans for which he or she is the named recipient.

Keep in mind: Investors ought to think about the investment objectives, dangers, charges, and expenditures related to 529 plans before beginning. You will find information about specific 529 plans is available in each provider's official declaration, which ought to be read thoroughly before investing. Before beginning, consider whether your state offers a 529 plan that gives citizens with favorable state tax benefits. Just like other investments, there are usually fees and expenditures associated with involvement in a 529 cost savings strategy. There is likewise the risk that the investments might lose money or not perform well enough to cover college costs as expected.

A present of more than the annual federal present tax exclusion quantity-- $14,000 for specific gifts and $28,000 for presents made by a married couple-- might have current tax and generation-skipping transfer (GST) tax repercussions (GST tax is an additional gift tax enforced on presents made to somebody who is more than one generation listed below you). If your contribution negatively impacts your grandchild's tuition, particularly the scholarship or grant portion, consider gifting the cash to your grandchild after graduation to assist him, or her in paying off student loans.

Remember, this strategy is quite complicated. You should definitely do this with your financial advisor at your side. 

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