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Grandparents Can Plan Estates, Pay For College
NEW YORK (3/12/13)--With the number of parents capable of saving for their children's college education dwindling, financial planners are pitching grandparents on the benefits of college-savings plans.

According to Sallie Mae, about 14% of all families with children younger than age 18 used the college-savings 529 plans last year--unchanged from 2010, the last time the student loan lender published the report (MarketWatch Feb. 28.) Moreover, the deposits are small and getting smaller, down to $1,770 on average in 2012--a 6% drop in two years.

Traditionally, 529 plans are used by parents to save for their children's education. But the state-sponsored tax-advantaged investment accounts can be an attractive estate-planning tool, an efficient way for a senior to transfer assets while contributing to a grandchild's education.

Some of the benefits of 529 plans:

  • You can contribute $70,000 tax-free upfront--five times more than the maximum tax-free gift--and, depending on the state, the 529 contribution could be eligible for a tax deduction or credit.
  • As the 529 account owner, you retain control of the account  and are the only one who can make withdrawals, even though after five years the money is no longer considered part of your estate.
  • You can use the account for nonqualified educational expenses, but the gains will be taxed at regular income rates and incur a 10% penalty.
Grandparents considering using a 529 plan can take steps to minimize its impact on their grandchild's student-aid application. Grandparent-funded 529 plans are assessed heavily, either as a student asset or as student income at 25% to 50% a year, resulting in significantly less student aid (Forbes Feb. 28).

To avoid this outcome, grandparents can transfer the account to a 529 plan controlled by their grandchild's parents before the first student aid application is due. Parental 529 plans are assessed at 5% to 5.6% and do not show up as income for either the student or parents.

For example, if Grandma transferred $100,000 from her account to a 529 plan controlled by her granddaughter's father, it would cost the grandchild $5,000 on her first student aid application, as opposed to $25,000 or $50,000 had Grandma retained control

Plan ahead. A few states don't allow a transfer in account ownership, though it's usually possible to roll over the assets to a 529 plan in another state that does.

For more information, read "Do You Need a Financial Plan?" in the Home & Family Finance Resource Center.

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