With the cost of a college education continuing to rise exponentially, opening a 529 for a grandchild is generous gift. You’ll be able to save for your grandchild’s future, get some good tax breaks and maintain control over the account, according to a recent article appearing on nj.com, “529 plan funding for a grandchild. ” The earnings are tax-free, as long as the funds are used for educational expenses.
The recipient grandchild won’t have control over the account or when distributions are made, and the owner can change the beneficiary of the account to a different member of the beneficiary's family at any time. This can be crucial if the account’s overfunded or not used by the grandchild. The definition of family member is quite broad and includes cousins and spouses of family members. In the event that you need the funds yourself, you could take a distribution.
If you did take a distribution, there’d be a tax owed and a 10% penalty on the earnings portion of the withdrawal since it wouldn’t be used for qualified education expenses. This gives grandparents some safety, if they need access to those funds.
The grandparent owner can also use 529 plan contributions as part of his or her estate plan, because it removes funds from the grandparent’s taxable estate. The contribution is considered a gift subject to the federal gift tax, but there’s an annual gift tax exclusion. It’s currently $14,000 per beneficiary per year, which is not subject to the gift tax.
Some grandparents will also front-load a lump sum of up to five times the annual exclusion amount to each beneficiary. They must then wait five years before any gifts to that same beneficiary would be eligible for the exclusion. Even if the gifts go over the exclusion amount, there is a lifetime exemption amount, which is currently $5.49 million dollars.
Some states don’t have a gift tax on lifetime transfers, but there are those that have an estate tax on estates valued in excess of a specific amount (usually less that the federal limit), which should be taken into account when estate planning.
It is important to be aware that you may already have estate planning in effect using the annual gift tax exclusion, with a life insurance trust or family limited partnership as part of your plan. If you’re thinking that someday you may need Medicaid assistance, your state will probably deem any 529 accounts you own to be your own assets. As a result, you’d have to deplete them before qualifying.
Finally, when your grandkids start looking at colleges, make sure to talk about these accounts with your kids. The 529 accounts –including those owned by family members—will be considered as assets belonging to the grandchildren for purposes of determining how much financial aid the school will offer.
Reference: nj.com (May 12, 2017) “529 plan funding for a grandchild”