Helping family members with college costs
The U.S. Department of Labor has reported that consumer prices for college tuition and fees have increased by more than a third since 2011, outpacing inflation over recent decades. Grandparents and other family members often want to help their grandchildren or nieces and nephews with these costs.
Several options are available. Individuals could make outright gifts to their students age 18 or over who are in college or about to go off to college. Federal tax law allows for an annual gift tax exclusion amount, which in 2022 is $16,000 per giver, per recipient. This means a single aunt with three adult nieces can give $16,000 to each one in one year, or $48,000, with no gift tax consequences. A married couple with five adult grandchildren in college can give $32,000 to each grandchild, or $160,000, and can do this year after year.
Minors are not legally allowed to own property. A custodial account managed by a grandparent or another adult could be opened for their benefit under the Texas Uniform Transfer to Minors Act.
A better option for those who wish and are able to provide substantial assistance is to establish 529 savings plans for the benefit of their family member. These 529 plans are tax-advantaged investing and savings vehicles that grow tax free and allow one to invest money to cover future college costs for a beneficiary. Withdrawals are also income tax free if they are used for qualified education expenses, which include tuition, books, certain technology, fees, and certain room and board expenses. The definition of qualified higher education expenses now also includes up to $10,000 in student loan repayments, and up to $10,000 per year in tuition for K-12 schools.
If the funds are used for non-qualifying expenses, federal taxes and a 10 percent tax penalty apply. However, as there is no age restriction on the investment, funds can remain in the account, to be available if the beneficiary’s plans change and educational costs arise in the future. Or, the beneficiary can be changed to a new beneficiary who is a qualified family member.
Finally, 529 plans enjoy favorable treatment for federal financial aid purposes for the student seeking assistance. If a grandparent or other family member is the owner, the assets are not treated as the parents’ assets. If the beneficiary’s parent is the owner, the account assets are treated as the parents’ assets, but account balances are counted at a maximum assessment of 5.64% for the calculation of the expected family contribution (EFC), which is less than the usual assessment for figuring the EFC.
There are a few things to consider before making gifts to help family members with college expenses. First, how do gifts affect your own overall estate plan? Older adults need to be certain that they have enough money to pay for their own needs and expenses, such as long-term care. Paying for private, at-home care or paying rent in an assisted living facility can be expensive. It would not do the family unit much good if the older family member “over gives,” creating a later burden on their own family members whom they were trying to help out. People should also be aware that giving away their funds can make them ineligible for Medicaid benefits for five years following the gift. Texas does provide an exception to this rule if the gift is to fund grandchildren’s qualified education plans, but seeking the advice of a competent elder law attorney is key in devising the best plan for yourself as well as your grandchildren or other family members.
You may visit our website at www.wrightabshire.com. Nothing contained in this publication should be considered as the rendering of legal advice to any person’s specific case but should be considered general information.