Providing a college education for the grandchildren is a dream of many individuals. With thoughtful estate planning, grandparents can give this gift even if they are no longer alive to see it. Deciding on the best method of paying for college education costs is an important decision in the estate planning process.
In making large monetary gifts to grandchildren, it is important to consider all tax consequences to avoid excessive gift and estate taxes. Individuals should understand and take into consideration the tax rules for generation skipping transfers (GSTs) and gift tax exemptions.
Paying tuition costs directly to a college is the simplest way to avoid tax liability. When a grandparent can make direct tuition payments, gift or GST taxes do not apply. Students will still need to pay for other college-related expenses, such as books, computer equipment, sport fees, and boarding expenses, as these cannot be covered by direct payments. Often, colleges will view direct tuition payments as resources, which could negatively affect financial aid eligibility. In some cases, naming a grandchild as the beneficiary of a ROTH IRA can also avoid negative tax consequences.
For many grandparents, the use of a trust can be an effective way to provide for the college education, including college related expenses, of their grandchildren. Money contributed to a trust does not become part of the taxable estate upon the grandparent’s death.
Trust funds do affect financial aid eligibility and are classified as taxable gifts by the Internal Revenue Service. Individuals can use their annual gift tax exclusion of $14,000 per recipient or $28,000 per receipt if a married couple is funding the trust, or the lifetime exemption to avoid tax consequences, but only if their grandchild is receiving a current benefit from the trust.
Some of the most common trusts used for the purpose of paying college costs include the Crummey trust and the Section 2503(c) minor’s trust, which allows a more tax-friendly annual gift exclusion.
Another effective way to fund a grandchild’s college education is to set up a state sponsored 529 plan. These tuition programs allow a grandparent to contribute funds, which allows tax-deferred money growth and tax-free proceeds when used for educational expenses. A 529 program can be either a prepaid tuition plan or a college savings plan, both which have the same tax benefits.
Given the complexities involved in providing for the costs of a grandchild’s college education, it is prudent to consult with an experienced Chester County wills and estates lawyer who can help you navigate the legal requirements and tax consequences of any monetary gift.
If you need assistance with estate planning for a grandchild’s college education, the experienced Chester County wills and estates lawyers at Eckell, Sparks, Levy, Auerbach, Monte, Sloane, Matthews & Auslander, P.C. are ready to assist you. With offices conveniently located in Media and West Chester, Pennsylvania, we serve clients throughout Chester County, Delaware County, and Montgomery County. To schedule a free consultation, call us at 610-565-3700 or submit an online inquiry form.