“It takes a village to raise a child” and in some cases a multi-generational effort to finance a child’s K-12 and college education in the United States. For grandparents with a big heart and the financial wherewithal to financially support their children and grandchildren, the following education funding strategies could be useful:
- Direct Payments
The simplest method for covering the cost of tuition is for grandparents to pay the tuition costs directly to the school or college.
Making direct payments can be accomplished gift and estate tax free,regardless of the size*.
This simple approach is particularly useful given today’s elevated education costs:
- Private University tuition: $60,000 to $80,000 per year
- Private K-12 tuition: $15,000 to $50,000 per year
529 College Savings Account Contributions
Another way to pay for tuition would be making annual gifts to a 529 College Savings Account, in which earnings grow tax-free, subject to limitations.
529 funds may be used for tuition as well as other educational expenses (ie: textbooks). Additionally, up to $10,000 per year may be accessed to finance private K-12 tuition costs.
In any given year, a grandparent may contribute up to the annual gift tax exemption (currently $16,000 in 2022) without any gift tax liability or reporting requirements.
- Grandparents may also “front-load” up to five years of contributions, or $60,000 in a current year.
- A married couple can front-load $120,000 to a single grandchilds’ 529 account.
In this scenario, the clear beneficiary is the grandchild (along with the grandchilds’ parents). However, grandparents may reduce the value of their taxable estate by virtue of gifting a significant sum of assets out of their estate. A 5-year look back provision applies*.
State Tax Credits and Deductions
Certain states offer an income tax deduction and/or tax credits for a portion of each year’s contributions to a 529 plan.*
Gifts to UTMA/Minors Trusts
While 529 plans offer meaningful tax benefits, investment options and other restrictions may apply. Thus, alternatives to 529 plans include UTMAs or Minors Trusts which could be customized by an experienced estate attorney.
Annual tax-exempt gifts apply as would GSTT (generation skipping transfer tax) guidelines. However, depending on the grandparents’ taxable estate, larger gifts could be made on behalf of a grandchild subject to proper gift reporting requirements.
Moreover, investment options are limitless and could include gifts of investment securities, real estate, interests in privately-held businesses, and/or other tangible assets.
In Summary
The cost of private K-12 and college tuition has risen substantially over the years and given today’s inflationary environment, these costs are likely to continue. Thus, for grandparents capable and willing to support their grandchildren, the tools above are worth considering.
*Multi-generational (grandparent to grandchild) gifting requires careful financial planning in coordination with tax, legal, and financial professionals. Please consult with your tax advisor(s) and estate attorney(s) before executing any gifts or contributions.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.