Published in the June 8 – 21, 2016 issue of Morgan Hill Life
By Dan Newquist
Dan Newquist
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.
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 college-based 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.
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 percent by the FAFSA, which can impact financial aid eligibility. By contrast, parent-owned 529 accounts are reported as a parent asset on the FAFSA (and assessed at 5.6 percent) 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.
Dan Newquist, CFP®, AIF® is a Principal Investment Advisor Representative with RNP Advisory Services, Inc., a registered investment advisor, in Morgan Hill. He can be reached at (408) 779-0699 or [email protected]. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.
