Dana Carlson Gentry, Esq., Board Certified in Wills, Trusts & Estates
College Education 529 plans have become popular tools to assist with the payment of college, and they are appropriate vehicles in the right situations. However, grandparents need to assess whether such plans are the right way for them to help their grandchildren with educational expenses. Some, but not all, of the factors that should be considered are as follows:
1. Before establishing a 529 plan for a grandchild, the grandparent should discuss the plan with the child’s parents and determine whether they have already contributed to a state prepaid college fund plan. A 529 plan may only be used for certain educational expenses, such as tuition, books, computers and electronic media related to the student’s education, and in some cases certain types of housing on the institutional campus. If the parents are contributing significant amounts to a prepaid plan, they may have already covered most of those expenses.
2. Although IRS regulations allow withdrawal of 529 plan funds for various types of educational expenses, to prevent abuse by individuals attempting to use these plans as their own personal IRAs, some of the companies that manage these plans have taken a restrictive view on how they will treat these distributions for tax purposes in order to show their compliance with the IRS regulations. Some of these companies will only issue a 1099 (for interest and dividend purposes) in the name of the beneficiary (grandchild) if the withdrawal or distribution is made directly to the college or university. From a practical perspective, most students obtain their computers and their books from other sources, including other students or online internet sources which may provide more economical choices for them. Even if your grandchild uses the college bookstore exclusively, the bookstore itself may not be affiliated with the university. Some students must pay the university directly also for its food plan which is not an allowable expenditure for 529 plans and some universities do not clearly allocate on their records between qualified 529 plan expenses and non-qualified expenses.
3. If your grandchild has received outside scholarships and prepaid funds that cover all of the tuition, then he or she needs the 529 plan funds for his or her other educational expenses, and the only practical way to pay those expenses is to direct those funds be sent to the student as allowed by the IRS regulations for those purposes. If a management company will only issue the 1099 as a qualified distribution to the student where the funds are paid directly to the university, this restrictive company policy presents a problem to the grandparent who properly distributes funds to the grandchild directly for the grandchild’s books or other educational expenses. That grandparent may get a 1099 in his or her name and will then have to report to the IRS on their personal 1040 return the income or dividend portion of the distribution, or risk an IRS audit of the grandparent’s income tax return for not reporting such income.
4. A grandparent may choose any state’s 529 plan, even if a student or the grandparent does not reside in that state. The student can choose to go to a college in another state unrelated to the state where the 529 plan was established. But, every grandparent should obtain a copy of the prospectus for a 529 plan and read it carefully to determine if that plan is the most appropriate way for the grandparent to assist in the grandchild’s education. Since the current annual exclusion gift limit is $14,000.00 per person, it may be more appropriate for the entire family if the grandparent chooses to make the annual exclusion gift directly to the grandchild rather than fund a 529 plan, particularly if all the grandchild’s qualified expenses are paid by a parent’s prepaid state plan fund or scholarship monies. In that case, the grandparent’s annual exclusion gift can be used for other essentials of a college education including off campus housing rent and food, without affecting the grandparent’s estate plan or personal income tax return.
If you would like further information on 529 plans or other ways of gifting for educational purposes, please feel free to call any one of our estate planning attorneys and we will be happy to assist you.
