Many grandparents are interested in helping pay for part of the grandkid’s college costs. Direct gifts and direct payment of tuition to the college are common ways to help. Section 529 plans are also popular. Neither of those actions give the grandparents an income tax deduction and are not taxable income to the grandkid. However, either option can affect your grandkid’s eligibility for financial aid. One option to consider is to hold off doing any action until the child has filed the last financial aid form.
Both direct gifts and Section 529 plans will reduce the wealth of the grandparents, but that is normally not a problem anyway. The lifetime “death tax” exclusion (the amount that is not subject to the death tax) is currently $5,430,000 for each person. That exclusion is reduced by any taxable gifts (large gifts, greater than the annual gift tax exclusion).
I personally favor doing gifts a semester (or quarter) at a time. As the student does well for one semester, then a gift for the next semester can be done. That way the student can understand their hard work and good study habits can result in more help.
Encouraging the student to try to earn some money by working in the summer and school vacations is also a good idea. If the student earns some wages, then a gift might be done to pay into the student’s ROTH IRA.
The applications for federal financial aid will need to disclose prior year distributions from the Section 529 plan and the ROTH IRA. That may reduce their aid eligibility the next year, but it is still a great help to the student.
When making a significant gift, in whatever manner, we suggest the grandparents also do a “love” letter. Students don’t usually get written confirmation of the love and concern. Some young folks have told me the letter was more important than the gift.
If you have an IRA (ROTH or regular) and want the grandchild to inherit all or part of it, you need to be sure the beneficiary designations are done correctly. Also, be sure to save a copy of the beneficiary designations with your other estate planning documents. We recently had a client that had almost everything set up for estate planning purposes, except for the beneficiary designations of the IRAs.
The custodian (a bank in this case) and the family searched high and low, but no one could find beneficiary designations for the two IRAs. So, the IRAs are being put through a Summary Probate so distributions can be made. That is a bother and some unnecessary expense. It will all work out in the long run, but it would have been so much better if the client records included the beneficiary designations.
Did you hear? “No matter how many times you have been wronged or hurt by others, all it takes is one act of kindness to make you believe in the goodness that exists in the world.” — Frederick H. Ryer.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.
