Many grandparents are eager to provide some financial assistance to their children’s children. Here are some ideas for how to do that most effectively.
Investing for college
Saving and investing for the skyrocketing cost of a college education is an ideal opportunity for grandparents to give a gift to their grandchildren, especially since the tax code and guidelines for college financial aid can work in your favor. When it comes to saving for college, 529s are a really good option. Sponsored by states and administered by many major mutual-fund companies and broker-dealers, they offer tax-deferred growth potential on investments earmarked for higher education. You open the plan, choose an investment and start saving. All investment income has an opportunity to grow tax-free, and as long as the proceeds are used for qualified college expenses, no income tax on the assets is ever due.
As with any investment, it is possible to lose money in a 529 plan. Also, by opening a 529 plan outside of your state, you may lose tax benefits offered by your own state’s plan.
Anyone can open a 529 account on behalf of a child — a relative or even a good friend. When a third party, not a parent, opens a 529 account, its assets are not used in calculating financial aid eligibility. Only 529 accounts owned by the parents or the student are taken into consideration on the Free Application for Federal Student Aid; the other major financial aid application — the College Scholarship Service Profile — does include third-party 529 assets in its calculations.
For this reason, if you’re a grandparent, other relative or a generous family friend, it may make more sense to open the 529 yourself instead of just giving the money to the child or the parents. Moreover, you can sock away quite a lot of money in the 529 plan without triggering a gift tax — up to $12,000 per grandparent, or $24,000 for a couple each year. Or you can make up to a $60,000 ($120,000 for a couple) contribution at one time, in lieu of additional gifts for five years. It’s best to open 529 plans when your grandchildren are relatively young, so that the accounts can benefit from the potential for long-term growth.
Paying tuition directly
Another way to help your grandkids with college expenses is a direct tuition payment. And if you, the grandparent, write a check directly to the school, there is no gift tax. So if you’re willing and able to do this, just write the check when the tuition bill comes in. This gift-tax exemption applies only to tuition payments, not the cost of room, board, travel and other expenses. However, since the tuition is not considered a gift, you’re still able to give a grandchild an additional $12,000 per year without worrying about the gift tax.
Investing for a child’s future
Another way you can invest in your grandchild’s future is by opening a custodial account in his or her name with any broker-dealer. You can control the account or manage its investments until the child turns 18 or 21, depending on your wishes and the laws of your state — some states let you control the assets until the child is 25.
Again, you won’t trigger a gift tax unless you give more than $12,000 per grandparent. Any child under age 19 will enjoy a small tax break: The first $900 of investment income is tax-free, and the second $900 is taxed at the child’s rate for 2008. However, every dollar of investment income over $1,800 is taxed at the parents’ marginal rate.
But here’s the downside for college-bound children: Custodial account assets are in the child’s name, which means they’ll count heavily in financial aid calculations.
Grandparents can also assist their grandchildren by simply helping out with their children’s finances. Pay for a vacation or day care, or perhaps even help with the down payment on a house. Most families with young children — especially if one spouse leaves the work force — face some financial challenges. You can help in some meaningful ways; however, unless the need is acute, I suggest investing in your grandchildren’s future.