Helping a grandchild save for college with a 529 plan may be rewarding for the grandparent as well as the child, especially with estate taxes poised to return in 2011.
Grandparents may open a 529 plan as a gift to a grandchild, with the grandparent remaining as the owner of the plan. Grandparents may deposit up to five years’ worth of gifts at one time, within a limit of up to $13,000 per year. The maximum gift is $65,000 for an individual and $130,000 per couple for each grandchild.
Once contributed, the assets are generally no longer considered as part of the estate (as long as certain conditions are met). With the potential for the estate tax to rise to a rate of 55% in 2011, reducing estate assets can be a valuable strategy.
College costs are rising. According to the College Board, the cost of four years of tuition, room, and board at a public college is estimated to rise to $157,801 in 2027, from $65,570 in 2009. And the cost of a private college is projected to soar to $369,646 in 2027, from $153,596 last year. By setting up and funding a 529 plan, grandparents may be helping reduce the amount of money their grandchildren will need to borrow when it is time to go to college.
In addition to helping meet those costs, the assets in a 529 plan are not counted among the grandchild’s federal financial aid calculations. This may enable the student to optimize the potential for other financial aid resources for college.
Even before the money is used for college, the grandparents have access to the money as the plan owners. This rule, unique to 529 plans, allows the grandparents to remove the assets from their estate and still retain some measure of control over them. If they chose to withdraw some of the funds, they would, however, have to pay taxes and an additional 10% penalty on the earnings (funds withdrawn from the 529 would be returned to their overall estate).
Many grandparents would like to participate in their grandchildren’s pursuit of higher education. By setting up a 529 plan, they may be helping them reduce the amount of money the students will need to borrow when it is time to go to college.