Funding a grandchild’s college education can be a beast: The amount of money that may have paid for your child’s four year undergraduate education may only pay for one year’s worth of tuition for your grandchild. This coupled with increasing housing costs and other relentless modern-day living expenses, make it hard for your children to adequately fund a 529 Plan to pay for your grandchildren’s college education.
Here are a few ownership and funding choices a grandparent may want to consider when funding a 529 Plan for a grandchild:
- Open a 529 Plan as the Owner: Funding a 529 Plan is unlike most gifts. For most transfers, once you make a gift you have no way to get the money back. However, while a 529 Plan is considered a completed gift (with some estate tax caveats if you front-load the Plan), it is actually easy to revoke and modify. If you don’t like the grandchild’s lifestyle choices, you may always change the beneficiary to another grandchild (or niece or nephew) at no charge. In the worst case scenario, you may even withdraw the money and face a tax and penalty on the gains.
- Gift the Donation to Your Child as Owner: If your child is a New York domiciliary you may gift the funds to him outright. The child will then take this money and transfer it to a 529 plan, in which case the donation will be income tax deductible to him for New York purposes up to $5,000 (and up to $10,000 if he has a spouse he files taxes with). If you donate to a 529 plan directly, you can take the same income tax deduction for New York income taxes, but as a grandparent you may have less taxable income than your child does, meaning your child’s family will benefit more than you would. Of course, if you foresee your son spending the gift instead of donating it to the 529 Plan, you should fund the 529 plan yourself.
- Donate the Funds to Your Child-Owned 529 Plan: This is, perhaps, the least desirable option, since it denies you of control to change the beneficiary or withdraw the funds, and you may not be optimizing the New York income tax deduction. It does, however, allow your child, the account owner, to ensure a consistent investment strategy for the 529 Plan, and to know how much assets are available for your grandchild’s education.
Remember to balance your needs of controlling the gift with the desire to help your child avoid taxes and maintain more family wealth, since merely giving a gift without forethought often does not fully accomplish your altruistic desires.