If you’re a grandparent when you begin your estate planning, you may decide you’d prefer to contribute to your grandchild’s college education while you’re still around rather than through your estate plan. That way, you’re giving them a valuable legacy and relieving their parents of some of the burden of worrying about the ever-increasing cost of a college education.
Most people don’t have a large enough estate to cover the cost of an elite private institution. However, you may have enough to make a considerable contribution to these expenses and give your grandchild more options than they’d otherwise have.
Let’s look at a couple of options for funding your grandchild’s college education while avoiding gift taxes and minimizing unnecessary taxes that can eat away at the value of your estate.
Contribute to a 529 plan
These are tax-deferred college savings plans. Each state has its own variation. You can set up a plan in your grandchild’s name or contribute to one their parents have already set up. It’s best to talk with them about what they’d prefer.
A 529 can also be a good wealth management strategy for you as long as you don’t exceed the gift tax limits. It’s also a way to remove assets from your estate and therefore minimize or eliminate estate taxes later. This is a good option if your grandchild is still years away from college.
Make a payment directly to the school
If your grandchild is nearing college age or maybe already enrolled, another way to help fund their education is to pay their tuition directly to the school. You may be able to fund anywhere from a semester to the full four years. If your payments are made solely for tuition (not room and board or other expenses), you don’t have to worry about gift taxes. This is another way to reduce the value of your estate and the potential for estate taxes while still ensuring your money goes to your loved ones.
Before you take either of these steps, whether as part of developing your estate plan or ahead of it, it’s wise to seek sound legal guidance as well as financial and tax advice.