Soon, many of our children will face the challengesof college while their parents face thechallenges of paying higher and higher tuitionfees. An AARP survey indicates that more thanhalf of the grandparents of college-age grandchildren arechipping in to help with college expenses. Usually, thegrandparents write a check to the parents of the college-boundchildren. However, there are other ways thismoney can be paid.
Gift Tax IssuesvIf you are making outright gifts, you are limited to$11,000 per donee ($22,000 if both grandparents join inthe gift). This is called the annual exclusion amount.Gifts greater than this amount may result in gift taxes.Gift tax rates are very high and should be avoided if possible.If you have appreciated assets such as stocks, youmay want to consider a gift of those securities directly tothe grandchild. Assuming the grandchild has little or noearned income (ie, in the 10% or 15% tax bracket), theycan sell the stocks and only pay a 5% long-term capitalgains tax (the child must be aged 14 or older). Comparethis to your 15% tax on the same gains. If you do planto make outright gifts, it may be harder for the studentto qualify for any sort of financial aid.
Another strategy is to pay the grandchild's tuitiondirectly to the college. Current tax law allows you to dothis without limit and without using any of your allowableannual exclusion amount. With tuition costs sohigh, this move is helpful, but again, it may affect thestudent's ability to receive financial aid.
529 Plan Advantages
If your grandchild is younger, get started today bycontributing to a 529 college savings plan. One greatcharacteristic of 529 plans is that you can continue tocontrol the assets until they are actually used for collegeexpenses. Also, the profits on the invested funds are notsubject to taxes when used for qualifying educationexpenses. It is unclear how these 529 plans may affectfinancial aid assistance, but the impact is expected to beminor. Contributions to a 529 plan are subject to theannual exclusion amount, but the rules allow you to giveup to 5 years' worth of gifts at one time. This means thatyou could contribute up to $55,000 per grandchild($110,000 if both grandparents join in the gift) this year.However, this would use up your gifts for that grandchildfor the next 5 years.
Prepaid tuition plans, offered by most states andsome private colleges, allow you to prepay college costs,effectively transferring the risk of rising tuition costs tothe state government or educational institution sponsoringthe plan. Recently, some of these plans have beenjeopardized, so you should check to make sure that yourplan is still financially sound.
Also, you can contribute up to $2000 per year intothe Coverdell Education Savings Account in the name ofyour grandchild. To be eligible, you must have earnedincome of at least $2000. If not, you may consider giftingthe $2000 to your child and have them open theCoverdell account. Funds invested in these accountsgrow tax-deferred and withdrawals are tax-free undermost circumstances. The funds can be used for a child'spublic and private elementary and secondary educationexpenses. The total that can be contributed to aCoverdell account per child is $2000 per year from allparties, so you need to be sure to coordinate these giftswith other family members.
For more information on 529 plans and Coverdellaccounts, visit www.welchgroup.com and click on"Cool Links" at the bottom of the home page.
is the founder of The
Welch Group, LLC, which specializes in providing
fee-only wealth management services to
affluent retirees and health care professionals
throughout the United States. He is the coauthor
of J.K. Lasser's New Rules for Estate and
Tax Planning (John Wiley & Sons, Inc; 2001).
He welcomes questions or comments at 800-709-7100 or visit
www.welchgroup.com. This article was reprinted with permission
from the Birmingham Post Herald.
Stewart H. Welch III