Plan Carefully Before Giving or Accepting Money for College
The best way for grandparents to help grandchildren and their parents with the cost of college depends upon the family’s situation and requires thoughtful planning. If the student is eligible for financial aid, a generous gift may put that aid at risk. New Jersey 101.5’s article, “Several ways to gift money for college,” outlines some of the options for this happy situation.
If grandma just wants to help the grandchildren with their education, she could set up a 529 plan for each child and contribute $50,000 to each account. 529 plans are tax-deferred accounts that are used for education. If the kids are young, the account could grow tax-free for years before it’s needed.
It’s a very tax-efficient way to pay for education; however, there can be gift tax issues when setting this up. In general, grandma is permitted to give each child $14,000 a year without using up any of her lifetime gift/estate tax exemption. Nonetheless, there’s a special rule for contributing to a 529 plan. If grandma contributes the $50,000 in the first year, it’ll be prorated over the next five years at $14,000 a year—a limit with little effect because the federal estate and gift tax exemption amount is now $5.45 million.
Grandma needs to remember another option: the payment of tuition directly to the educational institution is not a taxable gift at all, regardless of how large the payment. Bear in mind that the direct payment of tuition could jeopardize the child’s financial aid eligibility. If this is a concern, a 529 plan account is a better option, but grandma—not a parent—must be the custodian. If the parent is the custodian, the plan will most likely be deemed an asset of the parent, and this would have to be reported on the child’s financial aid application. Once payments were made out of the account, this would be considered income to the child and could put his or her financial aid in jeopardy.
Financial arrangements for college are challenging because every single college or university has its own rules and requirements. Here is an unconventional way to help with college costs: wait until the student has graduated and then give the grandchild the funds to pay off their student loans.
Speak with an estate planning attorney to ensure that any gifts do not impact the grandparent’s own estate plan or create tax liabilities.
Reference: New Jersey 101.5 (July 14, 2016) “Several ways to gift money for college”