When developing an estate plan, people commonly consider helping out their children and grandchildren with their educational financial needs. There are a few good ways that these educational expenses can be covered, according to The Legal Intelligencer in "How to Make Tax-Efficient Gifts to Children, Grandchildren for Their Education," including:
- 529 Plans are investment vehicles that allow people to invest money on an income tax free basis. If withdrawn for educational expenses, those withdrawals remain income tax free.
- Irrevocable trusts are another option; however, they do not have the same tax benefits as 529 Plans. However, they can be established as grantor retained trusts allowing the grantor to have greater control over the assets.
- Another option is to pay the child’s or grandchild's tuition directly to the applicable educational institution. Such payments would not be subject to Gift Taxes.
- IRAs can also be used for educational purposes when gifts to children or grandchildren are used to fund their own IRAs. However, you should consult with a knowledgeable professional first because there may be unintended tax consequences if not done properly.
There are a myriad of techniques that exist for funding the costs of higher education. Each technique has its own set of applicable rules and corresponding advantages and drawbacks. You should consult with an experienced professional in order to identify which funding techniques best suit your individual needs.
Reference: The Legal Intelligencer (Feb. 12, 2018) "How to Make Tax-Efficient Gifts to Children, Grandchildren for Their Education."