Grand Plans for Grand-boomers: How Grandparents Can Give the Gift of Higher Education
By John Cummings
Today, AARP estimates that there are 70 million grandparents in the U.S., and this number is expected to reach 74 million by 2010 as older grandparents live longer and as more and more baby boomers ¨C or grand-boomers ¨C join the ranks of grandparenthood. And just as baby boomers have transformed every stage of their lifecycle, it¡¯s likely that their new role as grandparent will be no different.
In fact, studies predict that the affluent boomer generation will influence how and how much their grandchildren save for college. Moreover, according to a 2002 survey from AARP, more than half of these grandparents say they have helped or will help pay for their grandchild¡¯s higher education expenses,.
The proliferation of Section 529 plans have caused many grand-boomers to inquire whether or not a Section 529 is the right option for them to not only pass along their wealth, but also as a means to pass along their educational values to their grandchildren and future generations to come.
Why Save Now?
Given the rising cost of college today, one of the most important things a grandparent can do is to help save for their grandchildren¡¯s educations. According to the College Board, the average cost of a four-year private college for the 2005-06 academic year is $21,235 (up nearly six percent from last year) and a four-year public college averages at $5,491 (up more than seven percent from last year) . Although these costs sound high, statistics from the U.S. Census Bureau suggest that the cost of not attending college can be considerably higher. In fact, individuals with a bachelor's degree earn 62 percent more on average than those with only a high school education and, over a lifetime, the gap in earning potential between a high school graduate and a college graduate can be more than $1,000,000 .
Why Choose a Section 529 Plan?
The main reason Section 529 plans are attractive to the beneficiary, as opposed to other savings vehicles, is that earnings in a Section 529 plan grow federal income tax-deferred and are currently tax-free upon withdrawal, as long as the withdrawals are used for qualified higher education expenses such as tuition, room and board, books and other higher education-related expenses . A Section 529 plan also offers high contribution limits, thus enabling families to save a large sum of money to pay for the growing cost of higher education.
On the other side of the spectrum, Section 529 plans also are attractive to grandparents because it enables them to reduce their estate taxes ¨C as assets in a Section 529 plan are considered completed gifts and, therefore, are not part of a taxable estate. This enables the grandparent to experience significant tax advantages while still making a generous gift. If the grandchild is still a baby, a grandparent can gradually contribute $12,000 annually without incurring gift-tax penalties. Under a special five-year gift rule, each couple may be eligible to make a special gift-tax election of $120,000, or $60,000 per individual, per beneficiary, as long as no additional contributions are made during the following five-year period.
Furthermore, another attractive feature to Section 529 plans is that anyone ¨C including family members and friends ¨C can contribute without restriction on income level or age. Additionally, most plans have no residency requirements and are open for contribution from anyone in the U.S. and the beneficiary can attend almost any college or university in the country ¨C including in-state and out-of-state, or public and private institutions.
Flexibility ¡ Just in Case
Every new grandparent hopes their grandchild will be the next great scientist, CEO or educator, but sometimes grandchildren have a mind ¨C and vision ¨C of their own. So what if the grandchild doesn¡¯t want to go to college, or a better scenario, what if the grandchild gets a scholarship - what happens to the money already saved in the Section 529 plan? There are several options to help parents and grandparents prepare for the unexpected ¡ just in case.
Foremost, unlike some educational savings vehicles, where control of an account is surrendered when a child reaches a certain age, a grandparent retains control of the Section 529 plan until withdrawals are taken. This enables grandparents to change the beneficiary at any time and allows them to transfer all or a portion of the account to another grandchild or qualified family member with no tax or withdrawal penalties. Secondly, if this is not a viable option, the grandparent can take back the money and pay income tax on the appreciation, plus a 10 percent penalty on the earnings. In the case of a grandchild receiving a full or partial scholarship, the withdrawal penalty is waived for the scholarship amount.
Leave a Legacy that Keeps on Giving
Today¡¯s grand-boomers are in a unique position to help future generations afford a college education. They have increased knowledge and awareness of investment vehicles that can make a difference in their lives and in the lives of future generations. They care about leaving a legacy and they place a lot of value on youth. Today¡¯s grand-boomers should work with their financial advisor to evaluate how a Section 529 plan can not only fit into their total financial picture, but also how it can fit into the financial futures of their grandchildren too.
Before you invest in a 529 plan, request an official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which you should consider before investing.
Any information presented about tax considerations affecting your financial transactions or arrangements is not intended as tax advice and cannot be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. You should review any planned financial transactions or arrangement that may have tax, accounting or legal implications with your personal professional advisors.
John Cummings is Head of Corporate & Diversified Financial Services Group, Global Private Client at Merrill Lynch.