COLLEGE PLANNING for the GRANDS

by DAVID NOVAK

With September 9th being National Grandparents Day, it’s an appropriate time to discuss how grandparents could help with their grandchildren’s’ greatest needs— helping cover the cost of education.

There are several different ways to help with college planning for the Grands, and all have their benefits and drawbacks.

The most straightforward way is to make outright gifts of cash or securities
to the grandchild. The annual limit on gifts—without triggering any potential
gift tax implications—is $15,000 per person, meaning that you and your
spouse could potentially gift $30,000 to each grandchild every year. Remember
that when making a gift, the funds technically do not have to be used for
educational purposes, as the grandchild (or account custodian if the grandchild
is a minor) becomes the sole owner of the money once the gift is made.

Also, keep in mind that if used for college tuition, a cash gift to a student
will be considered untaxed income by FAFSA, the federal government’s
aid application, and may impact the student’s financial aid eligibility.

An alternative method is for the grandparent to pay tuition directly to
the educational institution. Federal law does not consider paying someone else’s college tuition a gift, so there are no dollar limits in doing so.

Other college-related expenses, such as room and board, books, housing, etc., are considered taxable gifts, and therefore are subject to the $15,000 annual limit. While paying tuition directly guarantees that the money is used for education, it also may adversely affect any financial aid for the grandchild.

Finally, and perhaps the most popular option these days, is to contribute to a 529 for the grandchild. While the same limits apply to annual 529 gifts, they also allow several years of gifts to be front-loaded as a lump sum.

The attraction of 529 accounts is that after the money is contributed,
it grows tax-deferred and as long as it is distributed to pay for an approved
educational expense, comes out of the account tax-free. Recent changes to
tax laws have allowed 529’s to be used for more than just college; they can
now be used, with certain limitations, for private elementary or secondary
school. These 529 accounts have one owner, which is usually the parent but
can also be the grandparent.

Helping to pay for a grandchild’s college education can bring great personal satisfaction—just make sure you do it in the most efficient way possible.

David Novak, CFP® is a Certified Financial Planner™ at
Novak & Powell Financial Services in Pinellas County.
Please note: he is not an attorney and this article
should not be construed as one offering legal advice.
For information about investment decisions and
financial planning, contact him at (727) 451-3440.

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