Helping Grandchildren with College Costs
By Daniel T . Newquist , CFP ®, AIF ®
Daniel T . Newquist , CFP ®, AIF ® is a Principal Wealth Advisor with RNP Advisory Services , Inc ., in Morgan Hill with over 20 years experience advising clients on their personal wealth and business planning needs . Investment advisory services offered through RNP Advisory Services , Inc . – a registered investment advisor . Securities offered through Securities America , Inc ., member FINRA / SIPC . RNP Advisory Services and Securities America are separate entities . The Investment Fiduciary standard of care applies to advisory services only . dnewquist @ RNPadvisory . com or call 408 . 779.0699 .
As the cost of a college education continues to climb , more grandparents are stepping in to help meet the shortfall of covering the expense . Helping to pay for a grandchild ’ s college education can bring great personal satisfaction and , with a little planning , is a smart way for grandparents to pass on wealth .
Outright Gifts
Gifts of cash or securities are a common way to help grandchildren with college . However , be careful to consider that a gift of more than the annual federal gift exclusion limit —$ 14,000 for individuals and $ 28,000 for gifts made by a married couple — might have gift tax and generation-skipping transfer tax consequences . Additionally , a cash gift to a student will be considered untaxed income by the federal government ’ s financial aid application , FAFSA , which can impact financial aid eligibility .
One solution is for grandparents to give the cash gift to the parent instead of the grandchild , as gifts to parents are not reported as income on the FAFSA . Another option is to pay the college directly . Tuition paid directly is not considered a taxable gift , no matter how large the payment , however payments can only be made for tuition — room and board , books , fees , equipment , and other similar expenses don ’ t qualify . Be mindful that colleges will often reduce a student ’ s college-based financial aid by the amount of the grandparent ’ s payment . Before sending a check , ask the college how it will affect your grandchild ’ s eligibility for collegebased aid , scholarships or grant support . If your gift will have an adverse effect , consider gifting the money to your grandchild after graduation to help him or her pay off student loans .
529 Plan — College Savings Plan
A 529 plan is excellent way for grandparents to contribute to their grandchild ’ s college education . Contributions to a 529 plan grow tax deferred , and withdrawals used for the beneficiary ’ s qualified education expenses are completely tax free at the federal level and generally at the state level too . Funds can be used at any accredited college in the United States or abroad . Grandparents can contribute a lump sum to a grandchild ’ s 529 account , or contribute smaller , regular amounts . Lump-sum gifts , allowed under special rules unique to 529 plans , are allowed up to $ 70,000 per individual or $ 140,000 for joint gifts by married couples , and avoid federal gift tax .
Grandparent-owned 529 plans are not required to be listed on a student ’ s FAFSA application , however distributions from a grandparent-owned 529 plan are reported as untaxed income to the beneficiary ( grandchild ), assessed at 50 % by the FAFSA , which can impact financial aid eligibility . By contrast , parentowned 529 accounts are reported as a parent asset on the FAFSA ( and assessed at 5.6 %) and distributions from parent-owned plans aren ’ t counted as student income . To avoid having the distribution from a grandparent-owned 529 account count as student income , one option is to delay taking a distribution from the 529 plan until any time after January 1 of the grandchild ’ s junior year of college ( because there will be no more FAFSAs to fill out ). Another option is for the grandparent to consider changing the ownership of the 529 account to the parent .
Every family ’ s circumstances are different and proper planning is important . As a financial advisor we are partners in our client ’ s financial journey through life . Proper planning to make sure the intended gift of support is not only beneficial to your grandchild but is also in your best interest , is our priority .
Because the implications can be complex , consult your financial advisor or tax professional for more information before making financial gifts – or give us a call , we would love to help . This article is not intended as investment or tax advice .
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GILROY • MORGAN HILL • SAN MARTIN SEPTEMBER / OCTOBER 2017 gmhtoday . com