529 Plan Details:
Enter your state:
World's Simplest College Calculator:
How old is your child?
Find a 529 Pro:
Enter your zip code:
Enroll In a 529 Plan:
Pros and cons of 529s for grandparents
Cons:
- You might be able to reduce your gross estate even more with other approaches.
Perhaps you've already committed to an estate plan that applies your gift-tax annual exclusion to life insurance trusts, family limited partnerships, or other vehicles. Without a sufficient amount of unused annual exclusion, the contributions you make to a 529 plan for your grandchild can generate taxable gifts that use up part of your $1 million lifetime exemption, which in turn offsets your available estate tax exemption ($2 million if you were to die in 2008). Instead of saving in a 529 plan now, you can pay the college tuition bills directly to the school later on. Direct payments of tuition are excluded from the definition of a gift (the Section 2503(e) exclusion). But note that the direct payment option does not apply to the non-tuition categories of expense that can be paid from a 529 plan; that it requires you live long enough to see your grandchild off to college; and that payments received by the college from a grandparent can cause a financial-aid award to be rescinded.
- You'll have to coordinate your withdrawals with the parents.
If you are using a 529 plan, it's a safe bet that the parents of your grandchild are using one too. When it comes time to pay for college, whose account is tapped first? You will need to have that discussion at an appropriate time to ensure that no one faces an unexpected tax bill. You may even consider transferring ownership of your 529 account to the parents of your grandchild at some point in the future, and leaving it up to them to make all decisions regarding the use of the account. Check to be sure that your 529 plan accepts requests to change account owner—a few 529 plans do not.
- Your grandchild's college may ask about your 529 plan.
The treatment of a 529 plan under the federal financial aid formula is discussed above. But some colleges have their own money to dole out to deserving students, and they may want to know about any money already set aside in 529 accounts before awarding a grant or scholarship to your grandchild. This is another reason to bring in the parents beforehand and discuss the best way to set up and use your 529 account.
- You may lose out on Medicaid.
If you were ever to seek Medicaid assistance for the payment of medical and long-term care expenses, the state in which you live is likely to view any 529 accounts under your ownership as available assets that must first be spent on your care before Medicaid payments can begin. This is an issue that should be covered as part of your discussions with an attorney.
- Your heirs lose out on a "step-up" in tax basis.
If you were to die, the mutual funds and similar investments included in your gross estate receive a tax basis step-up to current value. When these assets are sold by your heirs, they will not be subject to capital gains tax on any appreciation previous to your death. Since 529 accounts are excluded from your estate, there is no step-up in tax basis. In most instances, this won't make any difference as the distributions from the 529 plan will be entirely tax-free when used to pay the beneficiary's qualified higher education expenses. It will only be in the event of a non-qualified distribution that the lack of step-up will result in higher taxes.
Posted August 1, 2008
Joe Hurley is the founder of SavingforCollege.com, and a certified public accountant.
College Calculator
The simplest way to estimate college costs.
Login to My Account