Back in the day, it was possible to pay for college by working over the summer and holding down a part-time job during the semester. Today, no student is realistically able to put themselves through school this way:
Assuming a student earns the average of state minimum wages ($10.40 per hour), they’d need to work 35 hours per week to cover the average costs at a public four-year school in their state. And that wouldn’t account for additional expenses, such as gas and car insurance, recreational activities or any unexpected costs. It also wouldn’t leave much room for the estimated 30-45 hours per week they’d need to dedicate to their full-time courseload.
Grandparents who are aware that college costs far outstripe their grandchild’s ability to pay out of pocket are often eager to chip in and pay for some education expenses. With a bit of careful planning, these generous gifts can benefit the donor’s estate plan without reducing the financial aid the student is eligible for.
Think Twice Before Writing That Check
The easiest way for a grandparent to give money to their grandchildren is to simply hand it over. But that might not be the best thing to do if the funds are going to be used for educational expenses.
Students who rely on financial aid to pay for college must report significant cash gifts and cash on hand on their annual Free Application for Federal Student Aid (FAFSA). Giving a grandchild money for school could inadvertently reduce the amount of money they get from their institution or from scholarships.
This is also an issue in situations where grandparents have offered to make direct payments to the educational institution on behalf of their grandchildren. This tactic for increasing the amount of money that can be given to a grandchild without triggering a gift tax used to be quite popular, but it has fallen out of style since the creation of 529 accounts.
529s Can Help Pay For College While Providing Estate Planning Benefits
529 savings plans are one of the best ways to provide financial support to a young relative that is furthering their education.
The money in these investment accounts grows tax-free. And withdrawals from the account are also tax-free if they are used to pay for college, K-12 tuition, apprenticeship programs, or student loan payments.
Unlike other assets owned by students or their parents, the money held in a 529 account will not dramatically reduce the amount of financial aid a student is eligible for.
Those donating to a 529 account also reap the benefits:
- In Mississippi, certain contributions to 529s are tax deductible.
- Money held in a 529 account is not considered part of the account holder’s estate for federal estate tax purposes.
- The beneficiary of a 529 account can be changed without penalty so long as the funds are used for educational purposes.
A 529 account can be an important tool in the estate planning toolbox.
Preserving Your Wealth. Protecting Your Loved Ones.
Helping the grandkids pay for college is an admirable goal. But grandparents should be thoughtful about how they hand that money over. Using a 529 account can give the donor tax benefits without reducing the amount of financial aid the student can get from other sources. If you have questions about 529 accounts or other ways to give money to your grandkids, the Palmer & Slay team is here for you. Please contact us today to schedule a meeting with our team of experienced estate planning attorneys in Brandon, Mississippi.