Should You Set up a College Savings Plan for Grandchildren?
Many grandparents want to leave assets to their grandchildren but don’t know how to go about doing that. Today, the most important asset that a person can have is education. With a college education, a person can earn much more over their lifetime and enjoy other benefits, such as greater life expectancy.
Many clients want to include their grandchildren in an estate plan but don’t know how to go about doing that. One attractive option for many grandparents is a 529 savings plan. This is an account you set up while living to pay for educational expenses. Please contact our estate planning lawyer in The Villages to see if a 529 aligns with your goals.
What is a 529 College Savings Plan?
This is a tax-advantaged investment account named after a particular part of the IRS Code. Essentially, consumers can open a plan and make after-tax contributions. The funds are then invested, much like a 401(k), and withdrawals are tax-free so long as they are made for a qualified educational expense. Tuition and books are two of the more obvious qualified expenses.
Changes in the tax code have broadened the appeal of 529 plans. Historically, they have been used to save and pay for college. They can now be used to pay for expenses related to elementary, middle, and high school.
How Does it Work as an Estate Planning Tool?
Parents can open a 529 account, but most of our clients are considering opening it for their grandchildren. It is an excellent tool for many reasons.
As AARP reminds us, the money put into a 529 savings account is removed from the taxable estate. This means that you can potentially avoid certain taxes or lessen the tax burden on your heirs when you die. Of course, contributions to a 520 are subject to the gift tax, though you can elect to make 5-years’ worth of contributions at once.
Another feature people like is control. Your children might have already set up a 529 for their children, but you might not like their investment choices. For this reason, you can open your own account and decide how to invest the money.
What Are Other Advantages?
A 529 account offers flexibility. For example, your grandchild might not pursue education, in which case you could change the beneficiary and name a different grandchild. Or you could even take money out of the account to use it for your own purposes, though you will need to pay taxes and possibly a penalty on the amount you take.
Are There Downsides?
Yes. A grandparent-owned 529 could make it harder for your grandchildren to qualify for student aid. In fact, this is a big disadvantage compared to a parent-owned 529. The Free Application for Financial Student Aid (FAFSA) considers a parent-owned 529 to be an asset, but distributions from a grandparent-owned 529 are considered income. Parental assets can reduce aid by around 5.64% of the asset’s value, but 50% of student income is calculated to reduce student aid.
You might consider having the parents open the account and then electing to allow you to contribute to it.
Helping Grandparents with Estate Planning in The Villages
A 529 plan should be part of a comprehensive estate plan. Please contact Millhorn Elder Law Planning Group today to discuss your options. Our consultations are free.