Many grandparents look for ways to transition wealth to younger generations in a manner that helps out the families. Working parents may be struggling to pay the soaring tuition rates and one way grandparents can contribute is to set up 529 college plans for their grandchildren.
A 529 plan grows tax-free and the withdrawals will not be taxed to either the grandparent or the beneficiary student as long as the money is used for approved education-related expenses. These expenses include private school tuition and expenses for K-12, student loan payments, college tuition and certain living expenses.
In the past some grandparents were hesitant to create 529s plans because the money in those accounts could be used to prevent the student from qualifying from other types of financial aid. This occurred because students were required to disclose any cash received from non-parent sources on the Free Application for Federal Student Aid (FAFSA). FAFSA would then calculate that amount listed by including half the amount to the official Expected Family Contribution amount. This would in effect reduce the recipient’s eligibility for federal financial aid by fifty percent.
The new FAFSA questionnaire, which will be in effect for the 2024-2025 academic year no longer requires this disclosure. This is due to the passage of the Consolidated Appropriations Act of 2021 which now allows grandparents and others to contribute to 529 plans for higher education without it impacting the student’s financial aid eligibility.
Using a 529 plan to help pay for grandchildren’s education expenses is better than outright gifting in most circumstances. See the reasons below:
1. The growth of interest in the 529 plan remains tax-free.
2. The distributions are tax-free if used for approved education-related expenses.
3. Contributions to 529 plans are considered gifts and the value of that gift is removed from the donor’s taxable estate.
4. 529 plans have evolved over the years and have become very flexible. Beneficiaries can be swapped out and the donor still maintains considerable control over the assets.
5. If the donor needs the money back for unexpected situations that arise in life, such as long-term care, he or she can withdraw the money. The money in this situation may then be taxable and a 10% penalty may be assessed.
For more information on gifting strategies such as using 529 plans to help out family members, contact the experienced estate planning attorneys at Stouffer Legal in the Greater Baltimore area. There are significant considerations that need to be made when gifting, even through 529 plans. This can impact your federal exemption, the ability to apply for Medicaid and other taxable issues. The estate planning attorney can carefully assess your specific situation and inform you of any other issues that may need attention if using this gifting strategy. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
