Several ways to gift money for college
Q. My mother wants to gift my two kids $50,000 each for college. I know there can be tax and financial aid consequences. Any advice on the best way to do this?
A. Your mother has several options.
The best way really depends on what is most important to your mom, said Mary Scrupski, the director of estate planning with Prestige Wealth Management Group in Flemington and Millburn.
Scrupski said if your mom just wants to help your children with their education, she could set up a 529 plan for each child and contribute $50,000 to each account.
529 plans are tax-deferred accounts that are earmarked for education, Scrupski said. Earnings are not subject to federal income tax and generally are not subject to state incometax when used for the qualified educational expenses of the designated beneficiary such as tuition, fees, books, as well as room and board, she said.
“If your children are young, the account could grow free of income tax for many years before it is needed,” she said. “This is a very tax efficient way to pay for education.”
But there are gift tax concerns in setting up the plan, Scrupski said.
In general, your mother can give each child $14,000 a year without using up any of her lifetime gift/estate tax exemption, she said, but there is a special rule for contributing to a 529 plan.
“If she contributes the $50,000 in the first year, it will be pro-rated over the following five years at $14,000 a year,” Scrupski said. “This limit has much less impact, however, than it used to because the federal estate and gift tax exemption amount is now $5.45 million.”
Scrupski said that payment of tuition directly to the educational institution is not a taxable gift at all, no matter how large the payment, so this is another option.
But the direct payment of tuition would most likely jeopardize any financial aid the child would be eligible for based on need, she said.
“If financial aid is a concern, then a 529 plan account might work so long as your mother is the custodian, and not a parent,” she said. “If the parent is the custodian, the plan will most likely be considered an asset of the parent and will have to be reported on the child’s financial aid application.”
Once payments were made, however, out of the account, then this would be consideredincome to the child and would impact his or her financial aid, Scrupski said.
“Planning for financial aid can be challenging because each school has its own rules,” Scrupski said. “Your mother might want to wait until the child is out of school completely and then possibly gift the child the funds to pay his or her student loans or make gifts for other purpose such as a down payment on a house or a wedding, instead of paying for school if the child is likely to receive financial aid.”
Your mom may want to work with her accountant or tax attorney before gifting anything, said Vicky Tomaro, an Investment Advisor Representative with Tomaro Financial Group in Wall.
If your mom gives more than the annual gift exclusion amount — if it’s not part of the special 529 five-year giving rule — it could affect your mom’s estate long-term, Tomaro said.
Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.