College Funding for Grandchildren

We have lots of great experiences with our clients here at Coyle Financial. But probably the greatest one is when we get a call about them becoming new grandparents. They’re very excited about their new grandchild – best thing that has happened in their life. A substantial life-changer.

But the interesting thing that happens, almost within a breath of announcing this new grandchild, is they say: “You know, I’m really concerned about their college.  How can I go about funding for their college?  What can I do?”

So the discussion begins. What do you want to accomplish? What are your greatest concerns? How does this fit into your big picture?

There are essentially four options, each with their own benefits and limitations.

  • 529 plans
  • An UGMA or UTMA account
  • A trust
  • Directly paying for tuition and student health insurance

Section 529 plans have become very popular since the Internal Revenue code was changed in 1996. They’re funded by a state and almost every state right now has one.

You can gift money to a 529 plan up to the annual exclusion, which is currently $14,000. If it’s grandma and grandpa, the gift can be up to $28,000 for each grandchild. And you can fund those five years in advance if you want to.

The funds in those accounts grow tax deferred and are distributed tax free if they’re used for college expenses. There are some other rules, but these are the key points. It’s a very popular funding vehicle today.

Uniform Gifts to Minors Act (UGMA) account, which some of you may know as the Uniform Transfers to Minors Act (UTMA) account, can be a nice option as well. Like the 529 option, it’s a gift. The account is in a custodian’s name for the benefit of the child.

The big difference here is that, when a child reaches the age of majority, the assets transfer to the child and they can do whatever they want with the money. In the state of Illinois, that’s age 18. That’s a little scary to most grandparents and parents – an 18 year-old gets money turned over to him.  So it’s not as popular like it was many years ago.

The third option is a customized approach where the grandparent creates an irrevocable trust that can fund education or other expenses. A trustee is named to execute on the grandparents’ wishes.  In this case, the grandparents can set up the trust to fund anything – college education, a business, money to buy a house, etc. It’s completely open and can be distributed by the trustees at any time, in whatever manner the grandparents want that to be done.

A trust provides a lot more flexibility. It doesn’t have the tax benefits of Section 529 plans, but it does have the benefit of complete flexibility. Normally you wouldn’t do this unless you were putting a lot of money in there — probably well over $100,000.

The fourth way is to just pay certain college expenses directly at the time the grandchildren go to college. This obviously is a long way off if your grandchild is a newborn, but it’s an exception to gifting. Specific expenses that you can cover are tuition and student health insurance. Room and board and book expenses are not allowable.

If tuition and health expenses are $100,000, grandparents can pay for them directly and it’s excluded from the $14,000 annual gift issue we mentioned above. With this method, you have full control and complete flexibility.

While the above is a very short summary, you can find plenty of detailed information. One source that I have found useful regarding 529 plans is a really wonderful website called It was started more than 15 years ago by a fellow named Joe Hurley. You can spend hours in there learning everything you want to know about 529 plans. It’s a great, great resource.

Another good source is a Mind Map that compares the first three options. We created it at Coyle Financial to simplify the evaluation of these alternatives. You can see the individual differences between these approaches. Call us. We’ll be happy to send you a copy.

Of course you can give us a call (800-480-7913) to discuss these in more detail or come in for an appointment. We’ll go through this very important issue and the alternatives. For those of you that are transitioning into the grandparent stage, this is often a key but complicated issue. We would love to help simplify your decision-making. So call and let’s start the dialogue

So until next time, enjoy.

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