Should Grandparents Fund College Savings Plans?
You have the cash and the willingness, but it might not be the smartest course of action.
Unlike parents of a generation ago, today’s parents know the importance of saving for college while their children are youngsters. The problem is that they often lack the ability to save, what with the other costs of child-rearing and household expenses.
Fortunately, grandparents are often in a perfect position to help. They tend to have more money and fewer expenses than parents -- and they love doting on the grandkids. No wonder: according to AARP, 52% of grandparents are helping to save or pay for college for their grandkids.
But is that the wisest action?
If you’re the grandparent, think carefully before you write checks to a 529 College Saving Plan, a Coverdell Education Savings Account or a custodial account formed under the Uniform Transfer to Minors Act.* Allow me to offer a strong case against the idea of your helping to save for a grandchild’s college education.
First, there’s no assurance that the grandchild will need your money. The kid might not go to college at all. Or he or she might win scholarships or grants that alleviate the need for the family’s financial support.
Second, you might not like the kid by then (or his parents). Oh sure, he’s a bubble of fun at age 4 and you see him almost daily. But by age 18, he might be a drug addict, a car thief or a high school dropout. His parents might have divorced by then, and your former daughter-in-law might have moved across the country, taking the child with her. By the time that kid is 18, you might not have seen him or her in years. This is someone to whom you want to give thousands of dollars?
Third, the kid’s parents might develop troubles of their own -- business failure, job loss, alcohol abuse, medical problems or the already-mentioned marital issues. The parents might raid the college account, grabbing the cash for their own purposes. Imagine how you’d feel if your money got diverted that way.
Fourth, you might discover that you need the money yourself! As you get older, you may decide to travel in style, or buy a beach house -- or pay for that heart operation. You’ll regret having given money away if you later need it.
Fifth, you might end up with too many grandkids! Magnanimously establishing a trust fund with $10,000 for your first grandchild is a fun and loving act, and when the second baby arrives, you’ll do the same in order to treat everyone fairly. But this could become a problem when you become a grandparent for the ninth time.
Yeah, yeah, none of this will ever happen in your family. But we’ve seen all of the above occur time and again among our clients. So, for all these reasons, let’s consider the idea that you don’t help your kids save for college for your grandchildren. Don’t fret -- I’m not being as heartless as it might seem. You see, I’m simply suggesting that you keep your money in your name. Then, when a grandchild goes to college, you evaluate the situation -- taking into consideration all the above issues. Based on the child’s needs, the needs of others, your financial ability and, most of all, your attitude toward the child, you simply (if you wish) write a check at that time.
But you won’t write a check to the grandchild or his parents. Instead, you’ll write a check directly to the college or university. There’s no gift tax limit when checks are payable to an institution. (By contrast, gifts to people cannot exceed $12,000 per year.)
If you’re concerned that you might die before a grandchild reaches college, well, that’s what wills are for. Simply amend your estate planning documents so that a stated sum of money will be placed into a trust fund to help pay for college for the grandkids. Any good estate attorney can draft the language for you.
If you follow this suggestion and refrain from contributing to the parents’ current college savings efforts, be aware of two downsides. First, by not placing money into a college savings plan, you lose the opportunity to shift assets out of your estate. If your net worth exceeds $2 million, this removes an opportunity to reduce estate taxes. Second, you deny yourself the joy of contributing to savings plans for the kids and grandkids. But you can solve that problem by helping them in other ways, such as buying them bicycles and cars and taking them on trips they couldn’t otherwise afford.
So do your grandparent thing, but do it wisely.
*Of all these choices, the 529 plan is the best. But that’s another story.