Financial Planning - December 2012

CLIENT

five-year contributions come from grandparents because they’re most likely to have accumulated enough wealth and to be concerned with estate tax planning.

Taking five years of gift tax exclusion upfront won’t automatically remove $65,000 from a client’s taxable estate. “If someone dies within five years,” says Kelly, “a pro rata portion of the gift will be returned to his or her taxable estate. However, the growth of those assets won’t be returned so it can make sense to make a larger gift at one time.”

Free oF the Formula
Even if grandparents are wealthy
enough to have estate tax concerns,
“Advisors should be cautious about
discussing the role of a grandparent-
owned 529 account in financial aid
planning,” Diehl says. “Some people
say that such accounts have no ramifi-
cations for financial aid. That’s true for
the asset itself -- it’s not on the FAFSA.
However, when distributions come
out of the 529 plan to pay for college,
they become income for the student.”
If the student’s grandmother uses
$20,000 from her 529 account this
year to pay for the grandchild’s edu-
cation, the distribution from that
grandparent-owned 529 plan will be
considered the girl’s income. (The
same is true for a distribution from
any 529 plan owned by a third party
and not reported as an asset on the
data from 2015. Thus, distributions
from the grandmother’s 529 plan to
the student in 2016 and subsequent
years may not affect financial aid.

Family values

Regardless of whether grandparents have estate tax concerns or hopes of helping to obtain financial aid, putting money into a grandchild’s 529 account may be an appealing option. “Unemployment is high and a college background can have a substantial impact on future earnings,” Diehl says. “If grandparents want to help grandchildren with college funding, then a 529 plan is the best vehicle,” he says.

Many grandparents think about

‘They like the idea of making the gift of education, rather than buying
their grandchildren computers or some other electronic item.’

there’s certainly no guarantee that their children — the parents of the students — have immense income or net worth. Financial aid may be needed to help make college affordable for grandchildren, and a grandparent-owned 529 plan can bolster that assistance.

Consider a family in which the father accumulates $100,000 in a 529 account for his daughter. When the student fills out her Free Application for Federal Student Aid form, up to 5.64% of her parents’ assets will be included in her family’s expected contribution. Holding the 529 plan in her father’s name can increase the family’s expected outlay by $5,640 and thus reduce financial aid by that much.

If the student’s grandmother is the person who owns that $100,000 529 plan, those assets aren’t included in the FAFSA calculation. The girl could qualify for $5,640 more in financial aid.

FAFSA form.) It will be reported on the next year’s FAFSA form as student income, which reduces financial aid eligibility by nearly 50%, or $10,000 in this case.

“There’s a workaround for those
situations,” says Mike Piershale, pres-
ident of Piershale Financial Group
in Crystal Lake, Ill. “The advisor can
tell the grandparent to delay distri-
butions from the 529 plan until no
earlier than January of the student’s
junior year, if it’s possible to wait that
long. By then, the student will be
done with filling out the FAFSA, so
the income won’t matter.”
Suppose that the hypothetical stu-
dents starts college in August 2013 and
graduates in May 2017. Her last FAFSA
form (assuming she won’t attend grad-
uate school and apply for financial aid
again) would cover the 2016-17 aca-
demic year. That FAFSA form will be
filed early in 2016, based on financial
college costs, Kelly says. “If a client’s
retirement strategy is clear, we ask
about secondary objectives,” he says.
“Grandchildren’s education is usually
not first on the list, but it’s generally in
the top five.”
As with any 529 plan, the account
owner can withdraw the money.
Income tax and a 10% penalty will be
due, but only on the earnings portion
of the withdrawal. So grandparents
can provide generous support to their
grandchildren’s future while knowing
they can reclaim their own money if
the school of hard knocks deals them
some unexpected tough lessons. FP