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Grandparents
Paying tuition directly avoids gift tax, so why use a 529 plan?
Your planner is correct in saying that the payment of tuition by you directly to a school is not considered a gift. (The school can be any educational institution, not just college.) If you have ways to utilize your $14,000 annual gift exclusion other than through contributions to a 529 plan or Coverdell ESA, the direct payment of tuition can be an effective tool for further reducing your taxable estate.
If you are not currently utilizing your $14,000 annual exclusion, you should understand the advantages of funding a 529 plan now and not waiting until your grandchild has tuition bills to pay. For one thing, you remove any risk that you will die before the money can be removed from your estate through direct payments of tuition. For another, the gift tax exclusion for direct payments applies to tuition but not to other costs that can be covered by 529 plans such as room and board, books, supplies, and equipment. Finally, be aware that the school is likely to treat your direct payment of tuition as a "resource" that reduces financial aid awards on a dollar-for-dollar basis. With a 529 plan, you can request that the withdrawal be made payable to the student, not to the institution, and this may (depending on the policies of the institution) lead to a better financial aid result.
Grandparent FAQs
- How to pick 529 plan if future college is unknown
- What happens to 529 plan money if child does not go to college?
- Can I withdraw money from a 529 plan for unplanned emergencies?
- Which 529 plan investment options should I choose?
- Should I set up a separate 529 plan for each child?
- Can a grandparent contribute to a parent-owned 529 plan?
- How do Coverdell education savings accounts compare to 529 plans?
- Do 529 plans count against Medicaid benefits?
- What happens to my 529 plan if I die or become incapacitated?
- Does a 529 plan count against eligibility for financial aid?
- What are the estate-planning benefits of 529 plans?
- Is giving money to a custodial (UTMA) account a good idea?
- Paying tuition directly avoids gift tax, so why use a 529 plan?
Learn about 529 plans
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