529 Saving Plans for Your Grandkids’ College

Grandfather and granddaughterA recent nj.com post says that a 529 College Savings Plan is a great gift for a grandchild. The article, “529 plan funding for a grandchild,” explains that opening a 529 plan gives you the ability to save for your grandchild's higher education in an account that has tax-free earnings, as long as the funds are ultimately used for education. When you contribute to a 529 plan, you retain ownership and control over the account—even though the money is a gift.

The recipient grandchild won’t have control over the account or when distributions are made, and the owner can change the beneficiary of the account to a different member of the beneficiary's family at any time. This can be crucial if the account’s overfunded or not used by the grandchild. The definition of family member is quite broad and includes cousins and spouses of family members. In the event that you need the funds yourself, you could take a distribution.

If you did take a distribution, there’d be a tax owed and a 10% penalty on the earnings portion of the withdrawal, since it wouldn’t be used for qualified education expenses. This gives grandparents some safety, if they need access to those funds.

The grandparent owner can also use 529 plan contributions as part of his or her estate plan, because it removes funds from the grandparent’s taxable estate. The contribution is considered a gift subject to the federal gift tax, but there’s an annual gift tax exclusion. It’s currently $14,000 per beneficiary per year, which is not subject to the gift tax.

Some grandparents will also front-load a lump sum of up to five times the annual exclusion amount to each beneficiary. They must then wait five years before any gifts to that same beneficiary would be eligible for the exclusion. Even if the gifts go over the exclusion amount, there is a lifetime exemption amount, which is currently $5.49 million dollars.

Some states don’t have a gift tax on lifetime transfers, but there are those that have an estate tax on estates valued in excess of a specific amount (usually less that the federal limit), which should be taken into account when estate planning.

It is important to be aware that you may already have estate planning in effect using the annual gift tax exclusion, with a life insurance trust or family limited partnership as part of your plan. If you’re thinking that someday you may need Medicaid assistance, your state will probably deem any 529 accounts you own to be your own assets. As a result, you’d have to deplete them before qualifying. Some colleges also look at 529 assets—even those owned by grandparents—when deciding to offer a grant or other award to the grandchild. Make sure that your adult children—the grandchild’s parents—know about your intentions for the 529, so they are not surprised when they apply for student loans, grants or work study programs.

Reference: nj.com (May 12, 2017) “529 plan funding for a grandchild”


Gifting Can Be a Smart Estate Planning Tool

Family christmas photoAs CBS Boston explains in “Our Families: Giving It Away,” your federal estate tax exemption, or the amount you can give away tax free when you pass, is $5.45 million for 2016. If you have more assets than that, your estate will owe federal estate taxes.

Married couples also have an unlimited gifting privilege between spouses in life or death.

The annual gifting exclusion a person can give away is $14,000 year to as many recipients as we want—provided that you have the money. Married couples can gift $28,000, or $14,000 each.

If you give away your money, your estate won’t be reduced by an estate tax on it when you die.  Therefore, you can whittle down your estate by maximizing your gift exclusion giving to reduce the estate that is potentially subject to estate taxes.

Not only can gifting be an estate planning tool for you to save on future estate taxes, but you can enjoy watching your dollars work for your children or grandchildren while you’re still alive.

 However, you shouldn’t give away assets that you might need in the future.

Another thought is, if you have grandchildren in college or grad school, you can pay their tuition and medical insurance. However, you need to pay it directly to the school, and you could still write them a check for $14,000 … and with your spouse, you could write it for $28,000.

Reference: CBS Boston (November 24, 2016) “Our Families: Giving It Away”


Can I Retire and Still Pay for My Kids’ College?

Graduation capA recent CNBC article, “Saving for college and for retirement isn’t impossible,” says that parents can fund college tuition and retirement if they begin saving as early as possible. And grandparents can help with well-timed tax-free gifts.
The cost of education is going to be highest for parents with younger children. For a couple today with a newborn, it’ll cost $455,585 to send him or her to a four-year private institution. But the cost of a public institution will be $202,768.
Let’s take a look at a hypothetical married couple. They’re 28 years old with a newborn, and they want to have a second child in a couple of years. The couple has been working since age 22 and earns a total income of $60,000. Their salaries are growing, and they’ve also been adding to their 401(k)s since they've started working and earning an average annual rate of return of 6.5%.
In addition, the couple’s been saving for college since the birth of their first child and they’re earning an annual return of 6%. They can accumulate $6.5 million by age 65 if they start saving 15% of their salaries in their 401(k)s at age 22. That deferral rate includes the couple’s 12% contribution and a 3% company match. When the first child is born, the couple (at age 28) can reduce their retirement plan savings rate to 12.2% and start to invest the difference or about 2.8% of salary into a 529 college savings plan.
After the second child arrives when they’re 30, they will continue saving to their 401(k), but at 9.4%. The difference (5.6% of salary) continues to go toward the college savings plan.
When the first child begins her freshman year of college and the couple turns 46, they can up their retirement plan savings to 12.2% and continue to fund the college plan. After the youngest kid starts college, the parents can go back to their original 15% deferral rate into their retirement plans. They’ll need to keep that level of savings until they retire at age 65. Plus, it’s an even better picture if grandparents help.
A person can make a lump sum contribution of up to $70,000 or $140,000 for married couples filing jointly to a 529 if the gift is spread over five years. Let’s say that grandpa and grandma make a $140,000 gift to the college savings account after the birth of the first child, the couple can continue deferring 15% of their salaries into their retirement plans. So when they hit retirement at age 65, they'll have $7.8 million in their 401(k) accounts.
It’s also important for the grandparents to know that gifting to the grandkids’ 529 lets them take advantage of the estate planning benefit.
But even with a solid savings strategy, fully funding four years at a private college for two kids is a pinch. In the past, guidelines suggest parents to use up to a third of their earnings to pay for college.
Reference: CNBC (November 7, 2016) “Saving for college and for retirement isn’t impossible”


Rolling Stone Jagger Needs Estate Planning for Expected Arrival

WillWhen Rolling Stone Mick Jagger isn't on stage later this year, he'll probably be at home changing diapers at age 72. Mick is awaiting the arrival of his eighth child. Although becoming a parent or having a child in older age is the exception and not the norm, experts in financial planning say it's becoming more common.
CNBC’s recent article, “Jagger’s changing diapers at 72. How to manage that,” notes that when people get remarried, they may—lo and behold—have more children.
Jagger isn’t alone in the senior rocker dad club because bandmate Stone Ronnie Wood, 68, and his wife just had twins in May, and Billy Joel at age 66 became a dad last year for the second time.
Becoming a parent later in life brings its own set of unique issues. Preparation is critical if you're going to juggle both day care and retirement.
The first issue to consider is guardianship, especially how you’d like your child to be raised if you pass away or become incapacitated. In this situation, the child's older sibling may be a good choice as guardian.
Next, as far as assets, you should think about creating a trust with certain provisions concerning how and when the money will be disbursed to the child, which can be important for those with multiple children. Parents should protect the minor child first.
To make a fair distribution of the assets and to keep the estate out of probate, consider a living trust, which can hold the assets to put the child through college. Then the estate can distribute assets to the adult children.
In addition, titling your property correctly is another important part of estate planning. Incorrect titling can mean assets falling outside of the trust, entering probate or being distributed in a manner not in accordance with the parent’s wishes.
Insurance raises some important considerations. With a child later in life and no work-based medical coverage, most retiree healthcare plans don’t cover minor children—and neither will Medicare. You’ll need to buy private coverage for your child. If you’re able to buy life insurance in your 60s or 70s, get a 20-year term policy that will protect your child through the age of majority in the event you pass away. If you are already claiming Social Security, your minor child may be able to get a payment of up to 50% of your benefit. The child must be single and under age 18, under 19 if he or she is still in high school, or 18 and over but disabled by a condition that started prior to age 22.
Parents can’t directly deposit their child's Social Security benefits into a 529 college savings plan, but it's common for them to spend the benefits on the child and invest a similar amount of money from their personal funds into a 529.
One piece of good news is that if you’re no longer working and are living off retirement savings, you’ll have a low employment income. If the majority of your savings is in exempted retirement accounts, you may be able to maximize financial aid.
Reference: CNBC (July 21, 2016) “Jagger’s changing diapers at 72. How to manage that”


A 529 Savings Plan for the Disabled?

Graduation capThis isn’t exactly a 529 plan. However, it’s sort of like one. It’s a new kind of account that’s similar in some ways and is designed especially for those individuals with disabilities.
An NJ101.5 article, “Special accounts for the disabled,” explains that President Obama signed the Achieving a Better Life Experience (ABLE) Act in 2014 as part of the Tax Increase Prevention Act of 2014. The law allows qualified individuals with disabilities to have tax-free savings accounts in which they can save up to $100,000 without jeopardizing eligibility for Supplemental Security Income (SSI) and other means-tested government programs like Medicaid. SSI benefits are suspended for individuals whose accounts are over $100,000, but their Medicaid benefits will continue.
The plan is modeled on 529 college savings plans, and interest earned on savings is free from income tax; however, contributions to the account will not be tax-deductible.
ABLE accounts are different from 529 plans in that the funds in these accounts can pay for education, health care, transportation, housing and some other similar expenses. To qualify, an individual has to have a disability that happened prior to age 26. Also, each individual with disabilities may have only one ABLE account, and the annual contributions are capped at the federal annual gift tax exclusion. That’s $14,000 this year.
Any funds that remain in the account when the account beneficiary dies must first be used to repay Medicaid for expenses incurred on behalf of the beneficiary.
States can offer these types of plans to people with disabilities, but they first must adopt regulations before financial institutions can offer the plans. Right now, Ohio is the only state in the country that currently offers such a plan, but other states’ residents can open an Ohio STABLE account.
The ABLE Act gives those caring for special needs loved ones another tool. However, the establishment of first- and third-party special needs trusts should be considered when contributions exceed the amounts allowed under the Act or when third parties don’t want their assets to be subject to a Medicaid payback.
A qualified elder law attorney can help guide you through your options.
Reference: NJ101.5 (July 1, 2016) “Special accounts for the disabled”

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