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00-17: Grandparents and 529 Plans
Tuesday, August 22nd 2000
What’s wrong with this picture?
A poll conducted by Richard Day Research and Bruskin/Audits & Surveys Worldwide for Fidelity Investments this past May found that 27% of parents of younger children plan to ask the kids’ grandparents or other family members for help with future college costs. That figure goes down to 12% for parents of high school students.
Now consider: their 1999 poll found that 62% (!) of grandparents would agree to help fund a college savings account if asked. They are particularly inclined to do so if the parents have begun their own college savings program. Talk about an underutilized resource for college savings!
It’s natural that so many grandparents with sizable retirement portfolios are attracted to the idea of helping out with the grandkids’ college costs. Beyond the obvious estate planning benefits, these people recognize the importance of a college education and have the desire to help out their children and grandchildren facing a large future expense. The gift of a college education is a wonderful thing.
But besides not being asked to help out, there are other reasons that grandparents may be reluctant to fund college savings accounts. The idea of irrevocably giving away hard-earned assets can be tough to swallow. What if I really want that money later on for travel, a reserve for medical expenses, or whatever? What if my grandchild doesn’t go to college and ends up using my money to pay for a Porsche? Will my money be blamed for the kid’s poor decisions?
Section 529 plans to the rescue.
Sure, 529 plans are a great tool for a lot of parents, but they are especially attractive for grandparents. Instead of giving up all control of the money, which is what happens with a gift to an UGMA or UTMA account, the grandparent as 529 account owner continues to have the power to decide when withdrawals are made and for what purpose. Funds can be transferred to benefit a different family member, or can simply be taken back (for a modest penalty). Many people find this hard to believe, especially when they are told about the estate and income tax benefits associated with 529 plans.
Of course, some of these problems can be handled through special education trusts or family limited partnerships. But who wants to incur the considerable time and expense of setting up and maintaining those vehicles unless the amount is very large?
There are some less obvious reasons for grandparents to be interested in 529. One is the tax hassle factor. Money put into an UGMA/UTMA will usually throw off taxable income each year to the child. Is the grandparent willing to prepare the income tax returns for the grandkids, or pay a professional to do it? Not likely. A 529 plan doesn’t throw off taxable income until the year withdrawals are taken. This can be a huge relief around April 15 each year.
And here’s the other reason grandparents and 529 plans fit so nicely: grandparents are not so hung up on capturing every possible nickel in investment return. Parents are understandably more concerned about it, because if the college savings account doesn’t perform, the difference needed for college bills probably has to come out of their pockets. Anyone who argues that the “conservative approach” or lack of investment direction in 529 plans means lower investment performance will find a less receptive audience among grandparents. By contributing to a safe, solid, well-managed 529 plan they have done their part – they don’t need to watch and see if it outperforms an Internet fund.
We’ve talked to a lot of grandparents, and the more we learn about their concerns the more convinced we are that they should be considering 529 plans. They offer a way for grandparents with financial resources to save for the grandkids’ college in a tax-advantaged way while eliminating the risk of the kid getting their hands on the money for other purposes, as well as the risk that they are giving away money that they might need in the future. Bravo.
If you are a parent with kids feel free to pass this 529 E-ditorial along to your parents or in-laws.
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