Opening 529 plan in grandparents name; any downsides?

Hello everyone,

I am finally getting around to opening a 529 plan for my 3 year old. I have been reading a lot about this, expecially on FW. It seems that one of the suggestions is to open one in grandparent's name which allows these funds not to be listed on FAFSA forms, etc. Does anyone see any downsides to this method? I honestly don't. Just want to get some opinions.

Bankrate's response

No state tax deduction for you if it is in the grandparent's name.

Don't use grandparent money to pay for anything other than senior year, if you receive aid.

rjdoc74 said:   centrifuge41 said:   Don't use grandparent money to pay for anything other than senior year, if you receive aid.

Could you please expand on that? Thank you.If you withdraw money from grandparent's 529 to pay for college costs, it is counted as child's income on the next year's financial aid forms (reducing the potential for aid). If you withdraw money from your own (or your kid's) 529, there is no income hit.

dcwilbur said:   rjdoc74 said:   centrifuge41 said:   Don't use grandparent money to pay for anything other than senior year, if you receive aid.

Could you please expand on that? Thank you.If you withdraw money from grandparent's 529 to pay for college costs, it is counted as child's income on the next year's financial aid forms (reducing the potential for aid). If you withdraw money from your own (or your kid's) 529, there is no income hit.

If a grandparent simply gifted money or paid tuition directly, would it count against the kids financial aid forms?

Looks like Beef's 529 topic alert isn't working again.

rjdoc74 said:   Hello everyone,

I am finally getting around to opening a 529 plan for my 3 year old. I have been reading a lot about this, expecially on FW. It seems that one of the suggestions is to open one in grandparent's name which allows these funds not to be listed on FAFSA forms, etc. Does anyone see any downsides to this method? I honestly don't. Just want to get some opinions.

This is something you'd have to ask a wealth planner and a CPA for your own unique circumstances. I can imagine a wealth planning scenario where this might actually prove to be a good idea if the grandparents and parents are substantially well-off and the relative size of the 529 assets or parent's assets would hurt them more than any amount of distributions treated as "income". Get some professional advice first before acting, and don't let a random FW poster or Bankrate article be the sole basis of your decision.

BrodyInsurance said:   greling said:   rjdoc74 said:   Hello everyone,

I am finally getting around to opening a 529 plan for my 3 year old. I have been reading a lot about this, expecially on FW. It seems that one of the suggestions is to open one in grandparent's name which allows these funds not to be listed on FAFSA forms, etc. Does anyone see any downsides to this method? I honestly don't. Just want to get some opinions.

This is something you'd have to ask a wealth planner and a CPA for your own unique circumstances. I can imagine a wealth planning scenario where this might actually prove to be a good idea if the grandparents and parents are substantially well-off and the relative size of the 529 assets or parent's assets would hurt them more than any amount of distributions treated as "income". Get some professional advice first before acting, and don't let a random FW poster or Bankrate article be the sole basis of your decision.

First of all, one shouldn't allow financial aid decisions to play much of a role when it comes to a 3 year old. It's just too long of a period for current rules to have much meaning on a future event.

What is a wealth planner? I think that one would probably get better advice here on the subject than from a CPA. It is my personal experience from having many CPAs as clients that very few of them have much knowledge on the subject. I know more than all of the ones that I have spoken to about the subject (at least 30). I am not saying that I'm an expert on the subject. I definitely am not one. Instead, I'm just pointing out that there is no reason to expect a CPA to have any knowledge above and beyond the basic taxation issues.

A "wealth planner", for those of you who have the money, is also known as a private banker. This person usually will have the necessary licenses and experience to be an RIA for HNWI's. It is very common for this individual to either be or partner with an attorney who specializes in estate planning and tax avoidance. Excellent guide on the subject found here. Those making less than $150,000/yr. need not apply.

BrodyInsurance said:   Jahlapenoez said:   dcwilbur said:   rjdoc74 said:   centrifuge41 said:   Don't use grandparent money to pay for anything other than senior year, if you receive aid.

Could you please expand on that? Thank you.If you withdraw money from grandparent's 529 to pay for college costs, it is counted as child's income on the next year's financial aid forms (reducing the potential for aid). If you withdraw money from your own (or your kid's) 529, there is no income hit.

If a grandparent simply gifted money or paid tuition directly, would it count against the kids financial aid forms?

If the grandparents gifted money, it would become an asset of the child and become counted as their asset. If they paid tuition directly, it would have the same impact as using the 529 plan.

I am thinking out loud on this one, so somebody please challenge my thinking here. If a grandparent has a 529 plan and they want to pay for a child's education and it is not the child's last year of school (ignoring gifting issues for the moment), they should remove the money and gift it to the parent. This should have a much smaller impact on aid than paying the tuition.
But if they did that the grandparents may incur some of the consequences below, which are from an article on savingforcollege dot com.

If you have earnings: You'll take the most severe hit if you're one of the lucky few who have earnings on your 529. First, you'll incur a 10-percent tax penalty on any earnings you withdraw (though not the principal). In addition, any earnings that you withdraw will be taxed as ordinary income — on state and federal taxes. Finally, if you received a state tax deduction as a result of your contributions, you'll be required to pay taxes on the contributions as well.

curtisekarr said:   BrodyInsurance said:   Jahlapenoez said:   dcwilbur said:   rjdoc74 said:   centrifuge41 said:   Don't use grandparent money to pay for anything other than senior year, if you receive aid.

Could you please expand on that? Thank you.If you withdraw money from grandparent's 529 to pay for college costs, it is counted as child's income on the next year's financial aid forms (reducing the potential for aid). If you withdraw money from your own (or your kid's) 529, there is no income hit.

If a grandparent simply gifted money or paid tuition directly, would it count against the kids financial aid forms?

If the grandparents gifted money, it would become an asset of the child and become counted as their asset. If they paid tuition directly, it would have the same impact as using the 529 plan.

I am thinking out loud on this one, so somebody please challenge my thinking here. If a grandparent has a 529 plan and they want to pay for a child's education and it is not the child's last year of school (ignoring gifting issues for the moment), they should remove the money and gift it to the parent. This should have a much smaller impact on aid than paying the tuition.
But if they did that the grandparents may incur some of the consequences below, which are from an article on savingforcollege dot com.

If you have earnings: You'll take the most severe hit if you're one of the lucky few who have earnings on your 529. First, you'll incur a 10-percent tax penalty on any earnings you withdraw (though not the principal). In addition, any earnings that you withdraw will be taxed as ordinary income — on state and federal taxes. Finally, if you received a state tax deduction as a result of your contributions, you'll be required to pay taxes on the contributions as well.

Nope. Because the beneficiary has qualified higher education expenses, the withdrawal is qualified. Money is fungible. There is no requirement that the money gets used for QHEE. The QHEE just have to exist.

Ex. I own a 529 plan with Curtis as the beneficiary. Curtis has $10,000 of expenses in January of 2012. I refuse to give any money to Curtis. He pays for school out of his pocket. In December of 2012, I take $10,000 out the plan to buy a new pair of shoes. It is a qualified withdrawal.

(since you mentioned saving for college dot com, let me point out that Joe Hurley, the guru with this stuff, agrees with me on this)

greling said:   A "wealth planner", for those of you who have the money, is also known as a private banker. This person usually will have the necessary licenses and experience to be an RIA for HNWI's. It is very common for this individual to either be or partner with an attorney who specializes in estate planning and tax avoidance. Excellent guide on the subject found here. Those making less than $150,000/yr. need not apply.I've never heard of a "wealth planner" per se, but I do have a friend who handles HNWI's - in his case, > $10 million. We've discussed 529's a number of times relative to his kids and mine, and it is definately not something he specializes in. This is most likely because his clients aren't really concerned about posturing themselves in the best possible way for financial aid (for obvious reasons).

If grandpa/grandma dies, the assets in the 529 become part of their estate and subject to their will. Unless, of course, you specify a successor -- yourself -- which you should definitely do.

BrodyInsurance said:   Ex. Grandma and Grandpa put $130,000 into 529 plans with 10 different kids and grandkids as beneficiaries. That $1,300,000 grows to $1.8 million over the next 6 years and then they die. Despite having complete control over that money, the $1.8 million is out of the estate.So who gets the money?

And with taxageddon coming in 2013, a 529 is superior to taxable investing for most HNW individuals. Estate tax free, total control, decades of tax free or at least tax deferred growth.

Something not mentioned, one in three Americans are spending money on the care of an elderly loved one.
If grandma or grandpa need help (and they will get older)
Will the 529 plan be counted as their asset? Will they have to spend the 529 plan down or will it get attached as a lien at death for elder care and health expenses?
How will the 529 be treated if you are trying to get government benefits in your state?

BrodyInsurance said:   Californiadeal said:   Something not mentioned, one in three Americans are spending money on the care of an elderly loved one.
If grandma or grandpa need help (and they will get older)
Will the 529 plan be counted as their asset? Will they have to spend the 529 plan down or will it get attached as a lien at death for elder care and health expenses?
How will the 529 be treated if you are trying to get government benefits in your state?

This is state specific, but you are bringing up a great point. Although from a gift and estate tax standpoint, it is treated as a completed gift to the beneficiary, it doesn't change the reality that the owner still has the money and is in complete control and the money is available to pay for elder care and health expenses. I am pretty sure that if a state does not exclude this asset, it is countable. The specific state and plan would also determine whether it has creditor protection or not.

Does anyone know what the rules are in CA?