Helping grandchildren with college costs

By Hayes Parnell III

Helping pay for a grandchild's college education is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes. Let’s discuss some ways to accomplish this goal.

One way to help with college costs is to make a gift of cash or securities, but this method has drawbacks. A gift of more than the annual federal gift tax exclusion amount – $12,000 for individual gifts, $24,000 for joint gifts – might have gift tax and generation-skipping transfer tax (GSTT) consequences.

A 529 plan is an excellent way to contribute to a grandchild's college education, while simultaneously paring down your own estate. Contributions grow tax deferred, and withdrawals used for qualified education expenses are completely federal and state tax free.

There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans are individual accounts offered by most states and managed by financial institutions. Funds can be used at any accredited college in the United States or abroad. Prepaid tuition plans allow prepayment of tuition at today's prices for the colleges that participate in the plan.

Grandparents can open a 529 account and name a grandchild as beneficiary, but only one grandparent can be the account owner. Grandparents can contribute to an existing 529 account with a lump sum or in smaller, regular amounts.

Lump-sum gifts have a big advantage in 529 plans because individuals can make a lump-sum gift of up to $60,000 ($120,000 for joint gifts by married couples) and avoid federal gift tax. A special election must be made to treat the gift as if it were made in equal installments over a five-year period, and no additional gifts can be made to the beneficiary during this time.

This money is considered removed from your estate, even though one grandparent can still retain control over the funds if he or she is the 529 account owner. Note that if the donor were to die during the five-year period, a prorated portion of the contribution would be “recaptured” into the estate for estate tax purposes. Under current law, a grandparent-owned 529 plan won't impact a grandchild's chances of qualifying for federal aid. Note that funds in a grandparent-owned 529 plan may still be included when determining Medicaid eligibility, unless these funds are specifically exempted by state law.

Your home town banker can help you create a plan to help grandchildren pay for college.







– Hayes Parnell III is the chairman and founder of Covenant Bank.

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