As a Houston estate planning attorney, a question I often get from my older clients is how they can best use their resources to help pay for the cost of their grandchildren’s education. With the cost of education increasing at staggering rates each year, and mounting student loan debt, more grandparents are opting to use a portion of their estate while they are alive in order to help defray the cost of their grandchildren’s college education.
The options for doing this vary depending on the age of your grandchild and how soon they will be entering college. If your grandchild is still young, the best method for saving for their education is probably a 529 plan. You can read more about 529 plans as an estate planning strategy in my previous post titled “Estate Planning with 529 Plans”. You can also learn more about 529 plans at the Texas College Savings Plan website. A 529 plan functions somewhat like an IRA because the contributions are allowed to grow tax-deferred and are never taxed, provided you use the money for educational purposes. The money can be used to pay for tuition and fees, but cannot be used to pay for living expenses. If the grandchild does not end up attending college, you can withdraw the money, but you may end up having to pay a penalty or forfeiting some or all of the earnings on your contributions, depending on the plan. You should speak to your financial advisor to find out if a 529 plan is a good fit for your estate plan.
If your grandchild is older or is already in college, your best option may be to pay his or her tuition and fees directly. As long as the money is paid directly to the college or university where the grandchild is attending, there is no limitation on the amount of tuition and fees you can pay each year. But please note that you cannot give the money to your grandchild and have him or her pay the tuition or fees, as this runs afoul of the tax laws. For gifts to individuals, you are allowed to give each person $14,000 (in 2014) without having to file a gift tax return or potentially pay any gift tax.
As with any decision regarding substantial gifts, you should speak with your Texas estate planning attorney, who should be able to explain the various strategies available for helping fund your grandchildren’s education and selecting the method that is the best fit for you and your family.