Intro to College Savings - Lesson 4

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Get family and friends involved

Grandparents are the second-biggest source of college savings (next to parents). When polled about their financial objectives, the desire to help fund the college education of their grandchildren consistently comes out on top. Other relatives and friends can also be impossible sources of college savings, although for purposes of today’s lesson we will include them in the term “grandparents.”

The question as it relates to grandparents is: what is the best way to get them involved tin your child’s college savings?

Ask them.
Many parents are understandably reluctant to ask the grandparents for financial assistance. After all, the responsibility for educating their children usually lies squarely on the parents’ shoulders.

Yet most grandparents, if asked, will respond positively. If you feel your child’s grandparents are financially capable and would be receptive to an invitation to join the college savings effort, you might approach them by first describing your own steps in setting up a college savings fund.

If your child’s grandparents are utilizing the services of a financial planner, you could ask whether or not the planner has discussed the possibility of helping to fund college. As the parent, it would be important for you to know what to expect so you can coordinate your own college savings efforts.

Grandparent vehicles

Not all of the college savings vehicles discussed in Tuesday’s lesson are appropriate for grandparents. For example, grandparents cannot take advantage of the education tax exclusion with U.S. savings bonds when the student is not their tax dependent. Also, most Coverdell education savings accounts require that a parent or guardian be named as the “responsible individual,” leaving grandparents out.

But 529 plans and UTMA/UGMA accounts are still available to grandparents and 529 plans, in particular, offer special features that many grandparents will find especially attractive.

Control and flexibility

Whereas a gift into an UTMA/UGMA account is irrevocable, a gift into a 529 plan is not. The 529 account owner remains in full control, and holds the right to say when distributions get made and how they get used. Contributions to a 529 plan can even be revoked for the account owner’s own purposes, although “non-qualified” distributions give rise to tax and 10-percent penalty on earnings.

Grandparents will appreciate the idea of access to the funds, especially if they are nervous about running short on financial resources in their retirement years. They are not likely to need their money back.

Some grandparents don’t need (or want) ownership of the 529 accounts

An alternative to setting up their own 529 accounts is for grandparents to simply make contributions to the accounts already established by the parents. With this approach, the parents control the future investment and use of the money, which makes sense when you consider that the parents typically have primarily responsibility for college funding. It also makes it much easier on the grandparents who no longer have to deal with account statements and distributions.

Estate planning benefits

Contributions to a 529 plan are considered gifts from the contributor to the account beneficiary, whether the contributor is the account owner or not. The account value is removed from the contributor’s gross estate without necessarily giving up any control.

For gift-tax purposes, the gift that results from a contribution to a 529 plan qualifies for the $14,000 gift-tax annual exclusion. A special election is available whenever large contributions are made—more than $14,000 in a year to a particular beneficiary—that spreads the gift out over five years and makes it possible to contribute as much as $70,000 without exceeding the annual exclusion.

These rules lead many wealthy grandparents to consider placing significant sums in 529 plans.

Coming up:

Lesson 5: How will my savings affect financial aid?

Previously sent:

Lesson 1: How much to save?

Lesson 2: Compare your options

Lesson 3: Shop for a plan