Smart Ways Grandparents Can Help Pay For CollegeSubmitted by Castlebar Asset Management on September 17th, 2015
Grandparents love their grandkids! Once their own needs are looked after many grandparent’s want to help out with their grandchildren’s education. Our client’s come to me and ask how their parents (grandparent’s) can contribute to their grandchildren’s college fund. There are several factors to take into consideration including taxes and financial aid issues when a grandparent is looking to help out with grandchildren’s college. Here are four of the most common ways.
The most popular way to contribute to a grandchild’s college fund is through a 529 account. There are two ways a grandparent can contribute. They can open an account in their name or contribute through a parent’s account.
If a grandparent wants to open an account in their name for their grandchild they get all of the usual benefits of a 529. They can even deposit up to $70,000 at one time and not incur gift taxes if they elect for the contribution to be considered over a 5 year period. As long as their contributions are less than $14,000 as an individual and $28,000 as a couple gift tax reporting is not an issue in a given year. There are some things to keep in mind though. The money in a grandparents 529 plan will be considered available assets to be spent on medical and long term care before Medicaid will begin. This is something to factor into any long term care planning.
Grandparent’s can contribute directly into the parent’s 529 as well. This can be easier to manage for the parents if all of the college money is in one account. There is no FASFA impact and the regular gift tax rules still apply. The downside is the grandparent’s will not have control over the funds since it will be in the parent’s name. Also depending on the state you live in you may or may not (grandparents) get any state tax credit for their contribution.
Pay Directly to the School
Paying for a grandchild’s school directly is a straightforward way to help out with college costs. If a grandparent pays all of the costs this an efficient way to accomplish paying for college. If they only pay part of the costs there are some things to keep in mind. For grandparent’s payment for tuition (not books or room and board) is not subject to gift tax limits. This is a great way for grandparents to pass on wealth and by pass the gift tax rules. Any direct payment will also be treated as student income on next year’s FAFSA form. This could reduce financial aid eligibility for the student in future years.
Payoff Student Loans
For some students, the fear of having massive student loans is an incentive for them to complete school on time and with a degree where they can get a great job after graduating. A grandparent can pay off their grandkids student loan in one shot or over time. Since your grandchild is out of school there is no impact on their financial aid. Grandparents only have to worry about the gift tax if they contribute more than $14,000 for an individual or $28,000 as a couple in a given year. If a grandparent’s health is in decline then this may not be the best strategy. If a grandparent passes away there is no guarantee their wish will be fulfilled.
An education trust is the iron clad way a grandparent can ensure their wishes for their grandchildren’s education is looked after whether alive or deceased. You can create and fund a trust that lays out the terms you would like distributions to be made for their education. You will have control over the terms but these are irrevocable. Any changes will need a trustee and beneficiary to approve. The downside of this method are the costs are high because you will have pay legal and accounting fees to maintain the trust. Taxes on earnings will be higher for a trust as well. It is a good solution for those who would like their grandchildren’s education paid for with specific terms but is not the most tax efficient way.
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