New York Estate Planning & Elder Law Blog
More and more grandparents are now using some of the money that they have tucked away using retirement and estate planning to help their grandchildren pay for college. According to a study done by Sallie Mae, 17% of families in the United States relied on relatives to help pay for college. This percentage is expected to increase as more grandparents use their estate plans to help benefit their families.
However, it is important that grandparents should be smart about how they help their grandchildren pay for school because it can have major tax consequences for them and their loved ones if the correct steps are not taken.
Understanding Estate Planning Gift Taxes
One of the biggest tax implications for grandparents and grandchildren are the federal gift tax rules. In 2014, the federal gift tax exclusion is $14,000. This means that each grandparent cannot gift more than that amount to a single person during the year without incurred taxes. At most, grandparents can gift one grandchild up to $28,000 without being taxed.
However, these is an exception to the gift tax rules if the grandparents are contributing the gift to a “529 plan.” Up to five years of gifts, or $70,000 per grandparent, can be contributed at once if paid directly to a 529 plan for a total of up to $140,000.
Establishing a 529 College Savings Plan
Estate planning experts usually recommend setting up a 529 college savings plan for grandparents that wish to help pay for their grandchildren’s college. One of the main benefits is that the grandparents maintain control of the account and the funds within it. The grandchild is named as a beneficiary of the account, but the grandparents remain the account holders. This allows them to transfer assets out of their estate into the account for estate planning purposes.
If the grandparents own the 529 plan, the account is treated like a student asset and is assessed as such. In addition, FAFSA assessed student income at 50% from the 529 plan which can seriously reduce the amount of aid given. However, if the grandparents transfer the account into a parent’s name before their grandchild applies for aid, all of these problems are avoided.
Disadvantages of Other Plans
A lot of grandparents assume that setting up a UGMA account for their grandchildren is the best course of action when helping pay for college, but the rules have changed drastically for these types of accounts over the years. The tax benefits that the accounts used to receive are now almost completely eliminated.
Additionally, the grandchild owns all assets in the account and can technically do what they wish with the funds, even if they were gifted for the purposes of paying for college. Because the grandchild owns the assets in the account, it can also dramatically impact the amount of financial aid that they receive through FAFSA and other government programs. This is because federal aid programs typically take into consideration twenty to 25% of the student’s assets, which includes any money gifted through a UGMA account.