The staggering cost of college makes it critical for families to plan carefully for this major expense.  In many cases grandparents want to play a role. As you examine the many financing options for your grandchildren, be sure to consider college financing in your estate plan.

Make direct payments

A simple, but effective, technique is to make tuition payments on behalf of your grandchild. So long as you make the payments directly to the college, they avoid gift and generation-skipping transfer (GST) tax without using up any of your $11.4 million gift or GST tax exemptions or your $15,000 annual gift tax exclusion.

Threr’s a disadvantage of direct payments though. If your grandchild is young, you have to wait until the student has tuition bills to pay. So there’s a risk that you’ll die before the funds are removed from your estate.

Draft a grantor trust

Trusts offer several important benefits. For example, a trust can be established for one grandchild or for multiple beneficiaries. Assets contributed to one, together with future appreciation, are removed from your taxable estate. In addition, the funds can be used for college expenses or for other purposes. Also, if the trust is structured as a “grantor trust”, its income will be taxable to you.  This allows the assets to grow tax-free for the benefit of the beneficiaries.

On the downside, for financial aid purposes a trust is considered the child’s asset.  This could potentially reduce or eliminate the amount of aid available to him or her. So keep this in mind if your grandchild is hoping to qualify for financial aid.

Explore all of your options

Other college financing options include:

• §529 college savings,
• prepaid tuition plans,
• savings bonds,
• retirement plan loans,
• Coverdell Education Savings Accounts, and
• various other tax-advantaged accounts.

If you’d like to learn more about your options for factoring college financing in your estate plan, please contact me.

(This is Blog Post #548)