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Planning to help grandchildren

By Jennie L. Phipps ·
Thursday, September 15, 2011
Posted: 7 pm ET

Growing up, I lived with one of my grandmothers every summer, and during the winter, I lived down the street from the other. Both of them were huge influences in my life. My own children -- because of death and distance -- scarcely knew their grandparents -- a hole in their lives that they probably don't know exists.

According to the U.S. Census Bureau, 6.7 million grandparents lived with their 7.5 million grandchildren in 2009. Some 2.7 million grandparents provided primary support for their grandchildren -- 1.7 million grandmothers and 1 million grandfathers. Of these, 1 million had cared for their grandchildren for at least five years.

I think most of us would prefer to see our grandchildren supported by their own parents, but are willling -- even eager -- to contribute in ways that make our grandchildren's lives better. One of those ways is helping them pay for college -- a gift that can free them from the debts that so many young adults are saddled with.

Carlo Panaccione, president of the Navigation Group in Redwood Shores, Calif., is a financial planner who recommends 529 plans, pointing out that they offer tax-advantaged growth and tax-free distributions if they are used to pay for qualified expenses like tuition, room and board, mandatory fees, books and required computers.

He says other things that are good about 529s are:

  • 529 assets remain under the grandparent’s control. The account owner, not the beneficiary, directs the use of distributions, so if one grandchildren drops out of school, you can redirect the money to another.
  • The value of the 529 plan is removed from a taxable estate.
  • If a grandparent spreads a contribution over five years for gift-tax purposes, the grandparent can front-load up to $65,000 per beneficiary (or $130,000 for a married couple) into a 529 plan without generating a taxable gift.

Panaccione warns that allowing a grandchild to use the money for anything other than higher education will result in your money being taxed as ordinary income, plus the IRS assesses a 10 percent penalty.

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