By: Don Mitchell
Jun 03, 2014
There's something magical about the bond most grandparents have with their grandchildren.
In my family, for instance, dad lovingly refers to his five grandkids as "the five most important people in the world." It's not that my brother and I aren't important, we're just not as important as our own kids. (Of course, my father says this with tongue in cheek).
The point is, grandparents will do just about anything for their grandkids, and when it comes to saving for college, they often want to help.
Wealth Management Advisor and Retirement Planning Specialist Jeffrey W. King, who works with Cartwright, Hitching & Frazier Private Wealth Management in Chattanooga, Tenn., said the main thing grandparents must do is involve the child's parents.
"Saving for college is ultimately the parents' responsibility," King said. "If you step on toes — that can create friction. You have to keep the parents involved so they will buy into the program."
King has three ideas advisors can share with clients who want to help ensure their grandkids get a quality education.
1. Gift the money to the grandchild's 529 plan
The IRS allows each grandparent to make an annual, tax-free gift of up to $14,000 to each grandchild for up to five years ($70,000 total). This means two grandparents can give a combined $140,000, provided they don't give any more money to the grandchild during that same five-year period.
"This is a positive reason for grandparents to get involved (with college savings) because it helps them reduce the value of their estate," King said, noting that less estate tax ultimately means a larger inheritance for family heirs.
However, it's important to know that if one grandparent dies after the third year of gift-giving, "The IRS can claw back the other two years of the amount gifted and put it back into (that grandparent's) estate," King warned. "And they probably will because it's the IRS, and they want to make that estate as big as possible in order to collect more tax revenue."
2. Match funds with the parents
With this strategy, grandparents match all contributions parents make dollar for dollar. King suggests grandparents cap the annual amount they're willing to contribute to a set amount. For example, grandparents might choose to match the parents' funds up to $5,000 per year.
"That's a 100 percent return that is often times hard for parents to pass up," King said.
3. Open a college savings plan as a wedding gift
King suggests future grandparents tread lightly here otherwise the newlyweds might feel pressured to have children immediately. One way to frame this discussion is to assure the married couple there is no rush, and the idea is strictly to get a head start on college savings.
This can be accomplished by opening a 529 in the name of one of the future parents. Then when the grandchild is born, the beneficiary can be changed over to the grandchild. If, for whatever reason, the couple never has children, the 529 can be used by the original beneficiary or simply cashed out.
"You can terminate the account and pay any taxes due, or you can take an art class at the local college and use it for yourself."
King said these strategies can be applied to other plans, including Uniform Transfer to Minors Act (UTMA) and Coverdell Education Savings Accounts (ESA). Obviously, the rules may differ with each vehicle. For instance, as with a 529, grandparents can give a tax-free gift of up to $14,000 per year to an UTMA; however, annual contributions are limited to $2,000 in an ESA.
The bottom line is advisors must educate their clients, assess each situation individually and gauge clients' attitudes toward risk.
"Financial advisors have to remember it's not about their own individual preferences," King said. "You have to go by what's in the best interest for each individual client."
Jeffrey W. King is a Registered Representative with, and securities are offered through, LPL Financial. Member FINRA/SIPC.
Before investing in a 529 college savings plan, investors should consider whether the investor's state or the designated beneficiary resides in or have taxable income in a 529 plan that offers favorable state income tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Investors should consult with their tax advisor before investing.
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