In many families, grandparents may play a significant role in the funding of education for their children’s children. Given the high cost of a college education and the not uncommon desire of students to graduate with little or no debt, tapping grandparent resources makes sense. It might be as simple as a grandparent writing a check to the grandchild, the educational institution or perhaps the parents of that grandchild.
A direct gift of cash to a grandchild may not be the best fit in many cases, though, as when the grandparent does not have the liquid cash available for a substantial current gift or does not wish to pay gift tax on a larger transfer to the child or its parent. When there is advance planning, these issues may be avoided, as a grandparent may direct funds to a section 529 plan for the grandchild and give the account time to grow before it is needed.
One clear advantage when considering the FAFSA and eligibility for college aid is that a student beneficiary of a section 529 plan funded by a grandparent will NOT have that asset considered in the calculation. This is the opposite of what happens when a parent funds a section 529 plan which is, of course, counted as an available asset.
This advantage is matched by an interesting disadvantage when the student beneficiary receives funds from the grandparent funded section 529 plan. In such case, fifty percent of the amount distributed is counted as income to the student beneficiary which is the harshest categorization for purposes of calculating the availability of financial aid from the institution.
The common wisdom is that since the FAFSA calculations look at prior years income, the time to take distributions from a grandparent funded section 529 plan is in the last year or so of college when the distribution will have no impact where education is not continuing past graduation.
Another approach may be to use a section 2503(c) trust funded by a grandparent (or parent) for the benefit of a minor child. This allows funding of goals including and beyond education and a more flexible approach than the section 529 plan. However, the funds become fully available to the beneficiary on reaching adulthood (usually age 21) and may be dissipated without achieving the donor’s intended goal.
Of course, there is always more to know and learn about the techniques for grandparents to use for educating their grandchildren and you may want to consult with your advisor to see what will work best for you.