If you want to leave your grandchildren money but can’t decide if you want them to inherit it or if you should put the money in a 529 plan, take a look at the benefits and drawbacks of each tactic. New Jersey 101.5 recently posted an article reviewing this topic entitled “How you can leave money to your grandkids.”
Some of the benefits of a 529 savings plan are that you can use the annual exclusion gift, now set at $14,000 per year per person. If you have three grandchildren, that’s $42,000 a year that you can exclude from your estate. If you put the funds in 529 plans, you still have control of them as the owner of the account, and you can make the grandchildren the beneficiaries. Another nice thing about the 529 plan is that if you need the money down the road, as the account owner, you can withdraw money. You would however be hit with a 10% penalty, plus taxes on the growth of the investment. Based on how much you want to give, you can front load five years of contributions in a single year.
The cons concern what you see as the future need of your grandchildren. A 529 plan is only designed to pay qualified secondary educational expenses. That means things like tuition, books and other supplies.
However, if one grandbaby doesn’t want to enroll in college, you can always switch the beneficiary to one of the others who is going to school. Another option is that the child could take the funds out for non-college expenses, but he or she would be hit with the same 10% penalty and taxes owed.
If you decide on these educational accounts, you should open a separate 529 plan for each child. An estate planning attorney can help evaluate if a trust is a better option all around. You should also talk to your grandchildren’s parents, as your plans might have unintended consequences for the kids’ financial aid prospects. Be sure you have a solid understanding of other money that may be available to your grandchildren for college. If they inherit the money outright, it’ll also affect financial aid because funds in the child’s name will be considered when financial aid packages are offered by prospective colleges.
Reference: New Jersey 101.5 (January 25, 2016) “How you can leave money to your grandkids”
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