When a grandmother wants to give her two grandkids $50,000 each for college, there can be tax and financial aid consequences. The best way to go about this depends on what’s most important to the grandmother, says New Jersey 101.5’s article, “Several ways to gift money for college.”
If grandma just wants to help the grandchildren with their education, she could set up a 529 plan for each child and contribute $50,000 to each account. 529 plans are tax-deferred accounts that are used for education. If the kids are young, the account could grow tax-free for years before it’s needed.
It’s a very tax-efficient way to pay for education; however, there can be gift tax issues when setting this up. In general, grandma is permitted to give each child $14,000 a year without using up any of her lifetime gift/estate tax exemption. Nonetheless, there’s a special rule for contributing to a 529 plan. If grandma contributes the $50,000 in the first year, it’ll be prorated over the next five years at $14,000 a year—a limit with little effect because the federal estate and gift tax exemption amount is now $5.45 million.
Grandma needs to remember another option: the payment of tuition directly to the educational institution is not a taxable gift at all, regardless of how large the payment. Bear in mind that the direct payment of tuition could jeopardize the child’s financial aid eligibility. If this is a concern, a 529 plan account is a better option, but grandma—not a parent—must be the custodian. If the parent is the custodian, the plan will most likely be deemed an asset of the parent, and this would have to be reported on the child’s financial aid application. Once payments were made out of the account, this would be considered income to the child and could put his or her financial aid in jeopardy.
Planning for financial aid can be tough because each school has its own set of rules. Grandma could also just wait until the kid is out of school completely and then give him or her the funds to pay his or her student loans. If the child is likely to get financial aid, she could make gifts for other purposes like a down payment on a house or a wedding—instead of paying for school.
Reference: New Jersey 101.5 (July 14, 2016) “Several ways to gift money for college”
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