HEY GRANDPARENTS- HERE YOU GO AGAIN!

Neal A. Deutsch, CFP^®

Published in Rivertown Journal, October 2008

Our grandson is a bit less than 2 years old now, and being the best grandparents in the absolute world (except for you, of course!) Elizabeth and I have plans to help our kids with college planning for him. With the cost of college going up at a rate far in excess of inflation, I can only imagine the financial obligation that will be put on our children to educate the next generation. I remember, as I am sure you do, what we went through to pay for our kids, and lo and behold, here we go again! While the rules and the parameters have changed somewhat in the span of a generation, here is a short list of options that you may utilize as you once again tackle this monumentus and loving task. If you find it perplexing, give me a call and we can discuss your options Grandpa to grandparent!

Uniform Gifts/Transfers to Minors (UGMA/UTMA) Accounts- The UGMA/UTMA Act provides a simple and inexpensive method of making gifts to minors, which will qualify as a present interest for the annual gift tax exclusion of $12,000 per year for each minor, indexed for inflation in increments of $1,000. The asset is place in the name of the minor, with the custodian making the decisions in the interest of the minor for support, education and maintenance. The danger and downside of this account is that the minor is fully vested in the funds usually at the age of 18, and may take control at that time for the utilization of his or her choice (and no, you can’t break their fingers, as I have often heard!). Income on the assets is taxable to the minor, whether distributed or accumulated. Consult your tax advisor for the tax ramifications for this and all plans for saving for college.

529 Plans- If your state or your designated Beneficiary’s state offers a 529 plan, you may want to consider what, if any, potential state income tax or other benefits it offers, before investing. Contributions are made with after-tax dollars, but any earnings grow tax-deferred. Withdrawals are federally tax-free, if used for qualified higher education expenses (tuition, fees, room and board and supplies). For withdrawals not used for qualified higher-education expenses, earnings are subject to income taxes at the owner’s rate plus a 10 percent federal tax penalty. The tax implications of a 529 savings plan should be discussed with your legal and/or tax advisors before investing. There is also the risk that the plan investments may lose money or not perform well enough to cover college expenses as anticipated.

Trust Planning- Another option is to form an Education Trust document, and make your contributions directly into the account of the trust. Generally, Grandpa may be the grantor (he who giveth the dollars) while Grandma serves as the trustee (she who controls the dollars). Of course, you may utilize the trustee of your choice. The terms of the trust can be anything you would like them to be, as long as they are kind and conform to the trust rules governed by the IRS. While this is the way to most control the funds, make sure you utilize a qualified attorney to set up the document and are aware of all the tax implication of this type of savings type.

Keep It In Your Name- Or, you can keep it in your name, and gift it to the grandchildren when you feel appropriate and the time is right in alignment with the annual gifting rules of the year of the gift.

While the options to help for college planning are many, the thought is the same: we love our grandchildren, and as with our children, want to help them to move forward in life while teaching them values and principles to be the best human beings possible. You can contribute and gift as little or as much as you like (within IRS guidelines) and anything you do to help will be appreciated by both generations. Ultimately, it’s all about love- spread it around and let it fly. Now- let’s go back to the conversation about who’s the best Grandpa in the world...

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Neal A. Deutsch is a Certified Financial Planner^™  & Registered Securities Principal, offering securities through First Allied Securities, Inc., member FINRA/SIPC.  Neal is President of Chestnut Investment Group in Suffern, NY, helping people with financial planning since 1984. Please feel free to call Neal at 845.369.0016 or email him with your questions at neald@chestnutinvestment.com. Visit his website at www.chestnutinvestment.com