Grandparents can help pay for a grandchild’s education by saving money in a taxable account and using the money for college-related bills, establishing a 529 college savings plan, and/or making an irrevocable gift to a grandchild through a Uniform Gift to Minors Act or Uniform Transfer to Minors Act (UGMA/UTMA) account.
Yes, grandparents can help pay for a grandchild’s education. The question they need to answer is: “What’s the best way to do it?”
Some grandparents decide that the best approach is to save money under their own name. When the time comes to pay college-related bills, the grandparents pay the college directly. There is some advantage to this since the payment of tuition in any amount is a specific exclusion to the gift tax laws. The other advantage is that there is not likely to be any financial aid impact. Why? Because any assets that have been set aside would be in the grandparents’ names and, as a result, would not usually be part of the grandchild’s financial aid calculation (provided the grandparents are not currently serving as the custodial guardians).
529 College Savings Plans
Grandparents can also establish 529 college savings plans and name their grandchildren as beneficiaries. While contributing to a 529 college savings plan doesn’t have the same advantage of unlimited gift and estate tax exclusion that a direct payment to a college has, there are significant advantages. For example, a contribution to a 529 college savings plan is considered a completed gift to the beneficiary for estate tax purposes. As a result, those funds are outside the grandparent’s taxable estate yet remain available to the grandchild in the event of the grandparent’s death. To avoid triggering a need to file a gift tax return, both parents and grandparents can contribute an amount up to the annual gift tax threshold ($13,000 per recipient for the 2012 tax year). If a couple makes the gift jointly, the annual exclusion is $26,000 per year.
Also, each grandparent can contribute up to $65,000 ($13,000 x 5) in a single year for each beneficiary, and elect that the gift occurred over a five-year period for gift tax purposes. If, however, the donor dies prior to the beginning of the fifth calendar year following the gift, the portion of the gift allocated to the years following the donor’s death goes back into the donor’s estate and is taxed accordingly.
Another approach to paying for a grandchild’s education is to make an irrevocable gift to the child through a Uniform Gift to Minors Act or Uniform Transfer to Minors Act (UGMA/UTMA) account. However, the disadvantage is that these funds will then be assessed for financial aid purposes later on. The other disadvantage is that a grandparent cannot require that a grandchild use the money in an UGMA or UTMA account for education. When the grandchild becomes an adult, he or she will have full discretion over the funds and could potentially decide to spend the money on another need besides college.
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