Today, many parents consider a college education necessary for their children’s long-term financial stability. However, they often have a tough time figuring out how they will pay for it without going into debt, jeopardizing their standard of living, or raiding their retirement savings – particularly if they have more than one child. They also balk at the idea of their children taking out student loans, saddling them with heavy debt just when they are starting out in life on their own.
In many cases, this is an issue that many grandparents have an interest in, as well, particularly if they have money available that can be used for this purpose. For many of them, this is a more meaningful way to help their own children and to give to their grandchildren than simply gifting money to them in their wills. It can be tremendously gratifying to materially help a grandchild get a good start in life, and it also allows grandparents a welcome opportunity to build a good relationship with their grandchildren and to be more involved in their grandchildren’s lives as they grow into adulthood.
The question, then, is what is the best way to do this, and can it be done through an estate plan? The answer is that there are many ways to provide financial assistance to grandchildren for their education, but determining the best way to do it will depend on many factors, including how many grandchildren you have, how old your grandchildren are, how large your estate is, and how much you are able to fund.
What Legal Instruments Can Be Used to Finance a Grandchild’s Education?
Other than outright gifts or naming grandchildren the beneficiaries of your will or retirement accounts, there are numerous mechanisms that can be used to finance a grandchild’s education, and they all have their pros and cons. Some of the considerations that should be taken into account will be their tax ramifications, how the schools will look at the financial resources when it comes to offering financial aid or scholarships, what happens to the funds if the child opts not to complete or even attend college, and so on. But without getting too far into the details, here are some ways that grandparents can help finance a grandchild’s education.
529 Plans: A 529 plan, so-called because it is based on Section 529 of the Internal Revenue Code, is an education savings plan. Although technically not an estate planning document, 529 plans can be incorporated into your estate plan, in the sense that you could contribute to such plans through your will or through a trust distribution.
529 plans can be started at any time. Not only parents, but any party, can open an account for a particular child. Any party may also contribute toward an existing 529 plan even if they did not create it. The contributions are tax deductible up to a certain amount annually (although gifts via a will will not qualify for the tax deduction from the estate). The funds in a 529 account may be used for tuition expenses at any level from kindergarten through graduate school, as well as, in many cases, for room and board expenses at college, and even for some college debt. One advantage of a 529 plan is that all withdrawals from the account, regardless of investment growth, are also exempt from taxation when used for qualifying educational expenses.
Before creating a 529 account, however, you should be aware of IRS rules about ownership of the plans, changing beneficiaries, and penalties for non-qualified withdrawals. Also, it is important to take note of the many different rules that govern how colleges regard 529 plans when determining financial aid packages.
Trusts: There are innumerable ways to compose trusts, and they remain one of the best vehicles for allocating estate funds for any specific purpose, including financing the education of grandchildren. Further, unlike 529 plans, a trust can be created for the benefit of more than one individual, and any limitations on the use of trust funds can be determined by the grantor (creator) of the trust. So, for example, while a 529 has numerous rules on how funds may be used without incurring taxes or penalties, a trust could allow funds to cover books, fees, travel, and other expenses that are incurred while attending college. There are a few specific types of trusts, however, that are often used to fund educational costs.
Minor’s (Section 2503(c)) Trusts, Crummey Trusts, GST(Generation Skipping Tax)-Exempt Trusts, and HEET (Health and Education Exclusion Trust) Gifts: All of these trusts are mechanisms that people have utilized in order to fund the education of grandchildren. Suffice to say that trying to explain these trusts briefly is nearly impossible: they each have a fairly complex set of rules that apply, and a brief explanation would probably do more to confuse than to clarify.
Having said that, each may offer various benefits depending on your situation, and all of them can provide a means for you to remove assets from your estate for the purpose of avoiding estate taxes, and to allow you ways to avoid gift tax liability. But they have varying rules about how funds can be withdrawn, the purposes for which funds can be withdrawn, tax ramifications for the beneficiaries, use limitations, and so on. Determining which one is right for you will require you to consult with an attorney who can look specifically at your situation and discover exactly what it is you want to achieve.
Providing practical help to your grandchildren, or even your children or great-grandchildren, is a great way to use your estate’s assets, and it can give you a great deal of personal satisfaction as you see your grandchild walk across the stage to pick up a diploma. It provides a useful and much-appreciated benefit to both your children and your grandchildren by easing the burden of having to either save for a college education or take on debt to cover college costs.
To find out more about how eLegacy Law can help you incorporate funding for your grandchildren’s education into your comprehensive estate plan, contact eLegacy Law today.