This fall, some 78 million American students from kindergarten to college will head back to school.
Planning for school can involve more than students
Grandparents can also benefit from their own “back-to-school” preparation. Advisors can help clients understand gifting strategies that can help grandchildren cover their college costs and deliver tax benefits to grandparents at the same time.
Grandparents may choose to fund a 529 college savings plan with their grandchild as beneficiary. However, as the account owner, the grandparent retains control of the account.
Tax benefits for grandparents include:
- No federal income taxes on account earnings while the account is invested, and no taxes when the money is withdrawn for qualified higher education expenses.
- A special gift tax exclusion associated with a 529 plan lets grandparents make five years’ worth of gifts to a single beneficiary, in a single year, without triggering the federal gift tax. The maximum gift amount for individuals is $70,000 and $140,000 for married couples.
- In some cases, contributions to a 529 plan can be removed from an estate for tax purposes. Grandparents may be able to reduce their potential federal estate tax bill while retaining control over the assets in the 529 account.
Additionally, assets held inside a grandparent-owned 529 account are not currently included in the calculation for the Free Application for Federal Student Aid (FAFSA), which may help put the grandchild in a better position to receive financial aid.
Before funding an account, or making a gift contribution, it is important for grandparents to seek advice from a financial advisor or tax professional to determine how to make the most of a 529 college savings plan. For more information on how a 529 plan may be used in estate planning, download the “Help a grandchild with college costs — and get tax benefits, too” PDF or visit putnam.com.