Many grandparents believe the best legacy they can leave their grandchildren is a good education. With the costs of college increasing every year (and doubling every nine years), funding a grandchild’s education can be one of the best inheritances you can give them.
Even if you don’t have the resources to pay for four years at an esteemed private college or university, you can contribute enough help to give them options they otherwise wouldn’t have. It can also help free them and their parents from being saddled with debt. With careful planning, you can also help avoid gift taxes and decrease the amount of your taxable estate.
Let’s look at two of the most common choices for funding your grandchild’s college education and their advantages.
A 529 plan
If your grandchild’s parents already have a tax-deferred 529 plan, you can contribute to it. If not, you can open one yourself. These plans differ by state, so it’s crucial to understand the rules for a plan that’s already been established – whether it’s here in Washington or another state.
You can contribute up to $75,000 individually or $150,000 as a couple in the first year. If your grandchild still has a number of years before college, the money has plenty of time for tax-deferred growth.
Paying the college or university directly
If your grandchild is nearing college age, you may want to consider paying part or all of their tuition. If you pay the money directly to the school, you don’t have to worry about gift taxes as long as it’s only for tuition. Money is given for room and board and other expenses could be taxed as a gift if it exceeds the limit.
Whether you’re in a position to fund a grandchild’s (or multiple grandchildren’s) entire college education or just help lighten the load for them and their parents, this can be one of the best ways to transfer wealth to a younger generation of your family.
Unlike a traditional inheritance via a will or trust, you can have the reassurance that the money is being spent as you intend. You may also still be around to see your grandchild graduate and make the most of the education you were able to help provide them. It’s crucial to have legal as well as financial and tax guidance as you decide how best to leave this valuable legacy.