Using Estate Planning to Cover a Child or Grandchild’s College Tuition
College tuition costs are escalating every day; not to mention all of the other costs that inevitably go along with them, such as funds needed to cover equipment, living expenses, school supplies, textbooks, and more. For many families with children, the thought of covering these costs is nothing short of daunting. However, many also do not realize that estate planning can help to address rising costs of college tuition and all of the expenses that come with sending a child to college via funding a Section 529 Qualified Tuition Plan, as we discuss below:
Clients interested in 529 programs have a choice between prepaid and savings plans. Prepaid plans can provide a distinct advantage in that they lock in today’s enrollment costs for tuition that won’t be needed until the future for a number of schools. For example, you could purchase four years of tuition credits in 2020 for a college education that doesn’t start until 2022, etc. Conversely, savings programs operate more like Roth or Traditional IRAs in that they are investments, where the funds grow if the investments perform well.
Tax Benefits & Flexibility
One distinct advantage to the 529 program over, for example, gifting a custody account or trust under the Uniform Gifts to Minors Act (or the equivalent in Florida, which is the Florida Uniform Transfers to Minors Act), is the tax deferment: Earnings on assets in the plan are not taxed until distributed, and distributions are tax-free as long as they fit into the definition of “qualified higher education expenses” (i.e. books, equipment, fees, room and board, supplies, and tuition) and the student is enrolled at least half-time. Any distributions beyond these expenses are taxed to the beneficiary if they represent earnings, along with a 10 percent penalty tax. Any contributions you make are treated as gifts to the beneficiary and qualify you for an annual gift tax exclusion, which is adjusted each year (thus, for example, in 2019 it was $15,000 per person or up to $150,000 per beneficiary if both you and your spouse contribute), and you have the flexibility to spread these out over five years in order to maximize the exclusion if you wish. Note that the annual gift tax exclusion is subject to change in the future, depending upon the administration.
You also have a certain amount of additional flexibility with these plans—you can roll them over to another beneficiary or plan at any time without any tax consequences, and all accredited post-secondary institutions and nonprofits, public, etc. schools are eligible.
Talk to an Attorney About Using Estate Planning to Fund College Tuition
Sitting down with an estate planning attorney is the first step to ensuring that you are on your way to strategically planning for the future. It does not have to be costly or time-consuming if it is done right and well in advance.
No matter what your needs, Moran, Sanchy & Associates can work with you to help you realize your goals. To speak with one of our Sarasota wills & probate attorneys, contact our office today for a free consultation.