Grandparents help with college

Grandparents can use a dose of savvy with generosity to help pay for college

Grandparents interested in helping pay for their grandchild’s college education may want a dose of savvy to go along with their generosity. It can be a great estate planning tool for the grandparent and educational boost for the grandchild. But the way they contribute can have financial ramifications on both.

Here are a few things to consider beyond just writing them a check:

1 Start early A fantastic way to help provide for a grandchild’s education is through contributions to a 529 plan. These plans are designed to help pay for education costs and the money earned in them is exempt from federal taxes when used for eligible expenses. Some states also offer tax benefits to encourage contributions.

Brent Fykes, a certified financial planner in Florida, suggests that those with time to build up savings make regular contributions annually. You can give up to $14,000 a year, or double that for a married couple, without exceeding the annual gift limit set by the IRS.

Or to get a quick start, you can also front-load the savings, by contributing five years of gifts — $70,000 or $140,000 for married couples — in a single year to be applied over a 5-year period without having to file a gift tax return.

These contributions can lower the size of a grandparent’s estate, lessening the tax burden later on. And if your grandchild doesn’t use all the money in the account, the balance can be transferred to a sibling or first cousin.

2 Pay directly Another option is to pay tuition directly to the school, which exempts the payment from gift tax rules and assures it’s being used for its intended purposes.

However, these payments may hurt the student’s eligibility for future financial aid awards.

3 Consider UTMA You can also consider contributing money to a UTMA, or Uniform Transfer to Minors Account. The money in these trusts can be put into any kind of investment, which is helpful for those who want more control over the portfolio or a workaround to rules prohibiting minors from owning stocks, bonds and other investment products.

UTMA’s don’t have the same tax advantages as a 529, however, or the same controls on how the money is spent. Additionally, the assets are then owned by the grandchild when they turn 21 years old.

The UTMA’s value may also count against eligibility for financial aid, as it’s considered an asset of the student.