Estate Planning

As a grandparent, you want to help your grandchildren succeed in life, and education is a big part of that. While college is important, it is also expensive. Many students cannot afford college, so they look to pay for it with loans, grants and scholarships. But if you can help your grandchildren avoid being burdened with student loan debt (that can often last for years after graduation), consider contributing to a 529 savings plan.

Rather than giving your grandchildren money throughout the year that they can spend anywhere, opening a 529 account lets you retain control of how the money is used. You also have the option to accelerate gifting, by contributing a larger amount up-front.

Regular 529 Gifting Contributions

If you are looking to reduce your taxable estate, you can contribute up to $15,000 per beneficiary (i.e. child or grandchild) per year. Married couples can contribute up to $30,000 per year.1

1 YEAR ANNUAL TAX EXCLUSION
DateTax YearTypeAmount
(Individual)
Amount
(Married)
Today 2018 Current Year $15,000 $30,000

Accelerated Gifting Contributions

Looking to contribute more than $15,000? You may contribute up to $75,000 in one year ($150,000 if a married couple) per beneficiary (i.e. child or grandchild) and treat it as if it were made over a 5-year period, free of federal gift tax, so long as no other contributions are made to the same beneficiary in that 5-year period.1

5 YEARS (AT ONCE) ANNUAL TAX EXCLUSION
DateTax YearTypeAmount
(Individual)
Amount
(Married)
Today 2018-2022 Current Year $75,000 $150,000
2018 Accelerated Year $15,000 $30,000
2019 Accelerated Year $15,000 $30,000
2020 Accelerated Year $15,000 $30,000
2021 Accelerated Year $15,000 $30,000
2022 Accelerated Year $15,000 $30,000

Best of all, when contributing to a 529 account even though the money is generally removed from your taxable estate, you retain control over the account. 1

Because contributions to 529 plans are generally considered completed gifts for federal gift, estate, and generation-skipping tax purposes, they qualify for the $15,000 ($30,000 if a married couple) per beneficiary annual exclusion from gift taxes. In addition, you may contribute up to $75,000 in one year ($150,000 if a married couple) per beneficiary and treat it as if it were given over a 5-year period, free of gift tax, so long as no other contributions are made to the same beneficiary in that 5-year period.

Tax benefits are conditioned on meeting certain requirements. Federal income tax, a 10% federal tax penalty, and state income tax and penalties may apply to nonqualified withdrawals of earnings. Generation-skipping tax may apply to substantial transfers to a beneficiary at least two generations below the contributor. Federal tax law now provides that up to $10,000 per year may be withdrawn from a 529 savings plan federal income-tax free, if used for tuition expenses at private, public or religious primary and secondary (K-12) schools. It is not currently clear what public K-12 school costs, if any, will be regarded as tuition for this purpose. State tax benefits and treatment of withdrawals for K-12 tuition may vary by state, may not have been updated for changes in federal tax law, and may be uncertain; consult a tax professional concerning your state. Gift examples are general; individual financial circumstances and state laws vary--consult a tax advisor before investing. If the contributor dies within the five-year period, a prorated portion of contributions may be included in their taxable estate. See the Investor Handbook for more complete information.

Helpful Hint

As a grandparent, to avoid your contributions being counted toward your grandchild's income on the FAFSA (student income is assessed at 50% and counts toward the EFC, which can affect financial aid), consider waiting to withdraw funds until later college years. Always consult a tax professional to determine what strategy is optimal for your saving situation.