Michael Kitces explores numerous different methods for grandparents to help contribute to their granchild(ren)’s education. He notes that in order to make valuable contributions, grandparents should use a 529 plan or gift assets but need to be wary of funding that may actually hinder their grandchild’s ability to receive financial aid. Kitces explains,

For instance, a grandparent-owned 529 plan is not treated as an asset of the grandchild for financial aid purposes, but distributions from a grandparent-owned 529 plan may show up on the grandchild’s FAFSA financial aid form (even if it’s a qualified tax-free distribution!). Similarly, gifts of appreciated assets from a grandparent to a grandchild may be eligible for 0% capital gains tax rates, if able to avoid the kiddie tax, but may still adversely impact the student’s income on the FAFSA. And for grandparents trying to diminish their own estates, often the best tactic is simply to make tuition payments directly to the college institution, which can be done above and beyond the annual gift tax exclusion limits.

Ultimately, the reality is that grandparents actually have numerous opportunities for preferential income and/or estate tax treatment by helping fund college for grandchildren (or other family members). But the financial aid rules – especially when considering the new “prior-prior year” (PPY) rules for which year’s income is reported on the FAFSA – means that coordinating the timing of the various strategies is crucial to avoid adverse financial aid outcomes!

Read Kitces’ full post and suggestions here: Grandparent 529 Plans & Other College Funding Tactics

Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal