“ The Best Kept Secret In America” Grandparents College Funding Ideas
College Funding <ul><li>Your guide to understanding the college financial aid rules and how to fund your grandchild’s educ...
College is EXPENSIVE! Average Public University Average Private College Elite Private College $16,000 $32,000 $48,000
College is Expensive <ul><li>Public U. - $137,940 in pre-tax dollars </li></ul><ul><li>Parents are notorious non-savers </...
Parents’ Complex Problems <ul><li>Desire to provide a good education  </li></ul><ul><li>versus </li></ul><ul><li>Wiping ou...
Example of Income &  Asset Shifting SHIFTING INCOME AND ASSETS TO A GRANDCHILD Grandparents' tax: Stock value $30,000 Stoc...
<ul><li>What is Financial Aid </li></ul><ul><li>Federal, state, and college funds </li></ul><ul><li>Types of Financial Aid...
Concept of Financial Need Based on a &quot;needs analysis&quot; formula Example   Total College Costs  $  20,000 -  Expect...
What is “Expected Family Contribution” (EFC)? <ul><li>How much the family can contribute </li></ul><ul><li>Based the “FAFS...
Expected Family Contribution <ul><li>Student’s Contribution </li></ul><ul><li>PLUS </li></ul><ul><li>Parents’ Contribution...
Expected Family Contribution Student’s Income x 50% = Income Contribution  Student’s Assets x 20% = Asset Contribution  Pa...
Custodial Accounts <ul><li>Simplest long-term method </li></ul><ul><li>Income is taxed to the grandchild </li></ul><ul><li...
Advantages of  Custodial Accounts <ul><li>Simplicity and low-cost </li></ul><ul><li>A reduction of grandparent’s income  <...
Disadvantages of  Custodial Accounts <ul><li>Loss of control  </li></ul><ul><li>“Kiddie tax” rules </li></ul><ul><li>Loss ...
Outright Gifts <ul><li>Simple short-term method of funding  </li></ul><ul><li>If under $13,000, not subject to gift tax </...
Advantages of Outright Gifts <ul><li>No loss of control until gift is made </li></ul><ul><li>Reduction in income tax </li>...
Disadvantages of  Outright Gifts <ul><li>Negative impact on financial aid </li></ul><ul><li>Loss of control </li></ul><ul>...
Gifts for College Tuition <ul><li>Made directly to an education institution </li></ul><ul><li>For elementary, high school,...
Advantages of Gifts for  College Tuition <ul><li>Reduces estate without affecting annual $13,000 gift tax exclusion </li><...
Disadvantages of Gifts for College Tuition <ul><li>Loss of control </li></ul><ul><li>Increased income in pre-college years...
Employing the Grandchild <ul><li>One of the best methods of funding </li></ul><ul><li>Must be a legitimate employee </li><...
Advantages of Employing  the Grandchild <ul><li>Income not subject to kiddie tax rules </li></ul><ul><li>Full standard ded...
Disadvantages of Employing the Grandchild <ul><li>Negative impact on financial aid </li></ul><ul><li>Payroll taxes are inc...
Loans to a Grandchild <ul><li>Short-term method of funding </li></ul><ul><li>Give more than the annual $13,000 gift tax ex...
Advantages of Loans  to a Grandchild <ul><li>Keep control of the asset </li></ul><ul><li>No effect on financial aid </li><...
Disadvantages of Loans  to a Grandchild <ul><li>No reduction of estate taxes </li></ul><ul><li>No significant income tax r...
Minor’s Trust <ul><li>Qualifies for $13,000 gift tax exclusion </li></ul><ul><li>Use of gift is delayed until age 21 </li>...
Advantages of a Minor’s Trust <ul><li>No loss of control until age 21 or older </li></ul><ul><li>Reduction in estate taxes...
Disadvantages of a  Minor’s Trust <ul><li>High trust tax rates </li></ul><ul><li>Loss of control </li></ul>
Crummey Trust <ul><li>Use if distribution at age 21 is undesirable </li></ul><ul><li>May be preferable to a Minor’s Trust ...
Advantages of a  Crummey Trust <ul><li>Assets can be shifted to the grandchild </li></ul><ul><li>Reduction in estate taxes...
Disadvantages of a  Crummey Trust <ul><li>Negative impact on financial aid </li></ul><ul><li>Loss of control </li></ul><ul...
Testamentary Trust <ul><li>Can provide funds through a will </li></ul><ul><li>Funded with insurance or probate assets </li...
Advantages of a  Testamentary Trust <ul><li>No loss of control until death  </li></ul><ul><li>Can be restricted to pay onl...
Disadvantages of a Testamentary Trust <ul><li>An older grandchild may pillage the trust fund  </li></ul><ul><li>Negative i...
Grantor Retained Trust <ul><li>Irrevocable trust for a certain term </li></ul><ul><li>Grantor retains a right to receive t...
Advantages of a  Grantor Retained Trust <ul><li>Only the value of the remainder interest is a taxable gift </li></ul><ul><...
Disadvantages of a  Grantor Retained Trust <ul><li>The income is taxed to the grantor </li></ul><ul><li>Assets not availab...
Charitable Remainder Trust <ul><li>Charitable intent and a desire to help  </li></ul><ul><li>Transfer assets to the trust ...
Advantages of a  Charitable Remainder Trust <ul><li>Reduction in estate taxes </li></ul><ul><li>Charitable donation tax de...
Disadvantages of a  Charitable Remainder Trust <ul><li>Loss of control  </li></ul><ul><li>Negative impact on financial aid...
Coverdell Education Savings Account (CESA) <ul><li>Long-term investment </li></ul><ul><li>Earnings and withdrawals are tax...
Advantages of a Coverdell Education Savings Account <ul><li>Withdrawals are tax-free </li></ul><ul><li>Earnings grow tax-f...
Disadvantages of a Coverdell Education Savings Account <ul><li>Contributions limited to $2,000 per year </li></ul><ul><li>...
Qualified Tuition Program (QTP) <ul><li>Tax-free trust account </li></ul><ul><li>College tuition, fees, room & board, book...
Advantages of a QTP <ul><li>Earnings grow tax-free </li></ul><ul><li>Gifts can be spread over 5 years </li></ul><ul><li>Re...
Disadvantages of a QTP <ul><li>If the grandparent dies within the 5-year period, the gift balance is put in the estate </l...
Roth IRA <ul><li>Long-term method of funding </li></ul><ul><li>Original contributions may be withdrawn tax and penalty-fre...
Advantages of a Roth IRA <ul><li>Earnings grow tax-free </li></ul><ul><li>Withdrawal of original contributions for  colleg...
Disadvantages of  a Roth IRA <ul><li>Income limit on contributions </li></ul><ul><li>No reduction in estate taxes </li></u...
Life Insurance <ul><li>Long-term method of funding </li></ul><ul><li>Can be funded on the life of a parent </li></ul>
Advantages of Life Insurance <ul><li>No effect on financial aid </li></ul><ul><li>Earnings grow tax-deferred </li></ul><ul...
Disadvantages of  Life Insurance <ul><li>High sales and administrative costs </li></ul><ul><li>Conversion of low-taxed cap...
Annuities <ul><li>Long-term method of funding </li></ul><ul><li>A grandchild can be the beneficiary </li></ul><ul><li>Matu...
Advantages of an Annuities <ul><li>No effect on financial aid </li></ul><ul><li>Earnings grow tax-deferred </li></ul><ul><...
Disadvantages of Annuities <ul><li>High sales and administrative costs </li></ul><ul><li>May lack loan features </li></ul>...
Action Plan <ul><li>Consider the financial options  </li></ul><ul><li>Consult a competent advisor  </li></ul><ul><li>Combi...
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Grandparents College Planning Ideas

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  • Copyright © 2009 NICCP 1
  • Copyright © 2009 NICCP One of the most rewarding experiences in a grandparent’s life is helping send a grandchild to college. However, college has changed in the last fifteen years. Dramatically!! Today, the cost of a higher education has skyrocketed beyond the ability of most parents to pay. In 2009, the cost of a state public university will average $16,000 per year and private colleges averaged $32,000 per year. Harvard, Stanford, Duke and others exceeded $48,000 per year. Other than purchasing a home, paying for a college education will be a family’s single largest expenditure. The cost of college becomes staggering for a family with two or three children, and if more than one child attends college simultaneously, the financial pressure may become overwhelming.
  • Parents (baby-boomers) with college-bound students are notorious non-savers, and generally, have not developed a plan of how to finance college costs. A recent survey of American families revealed that only about half of families have saved a dime for college. Of those who have saved, only 4% have saved over $5,000 for future college costs.
  • Thus, parents today are saddled with a complex problem. They would like to provide their child with a good education, but they do not wish to exhaust their family savings and retirement accounts or assume overwhelming debt to accomplish this. To solve this problem, parents often turn to the grandparents for help to fund college costs.
  • The following is a typical example of the type of financial planning commonly done by grandparents to help with this problem. SHIFTING INCOME AND ASSETS FROM PARENTS TO A CHILD It is common practice, among accountants and financial planners, to try to shift income and assets from the grandparents to a grandchild. This is done to take advantage of the grandchild&apos;s lesser tax bracket. In this example, the grandparents have a stock fund that is to be used to cover the cost of their college-age grandchild&apos;s education at an expensive private college. It was suggested by the family’s financial advisor that the grandparents gift $30,000 of the stock (cost basis of $20,000) every year to the grandchild for college costs. The stock would then be sold in the grandchild&apos;s name and the money would be put into the grandchild&apos;s college savings account. The logic behind this strategy was to shift income from the sale of these stocks from the grandparents to the grandchild. As can be seen in the computations in the following slide, the tax savings would amount to $1,500 per year for this family. However, the loss in financial aid could exceed $10,000 per year.
  • WHAT IS FINANCIAL AID? College financial aid is money given by the federal and state governments and the colleges to students to help pay for the cost of a college education. There are several types of aid available, including grants and scholarships, educational loans and work-study programs.
  • THE CONCEPT OF FINANCIAL NEED The financial aid system presumes that the family is to contribute some money toward their children’s educational expenses. How much the family is expected to pay is determined by complex formulas. The difference between the amount the family is expected to contribute and the total cost of college represents the student’s FINANCIAL NEED. The process of determining a student’s FINANCIAL NEED is called NEEDS ANALYSIS. It is calculated using the following formula: Example Total College Costs $20,000 - Expected Family Contribution - 8,000 = Financial Need $12,000 - Student’s Resources (e.g., private scholarship) - 2,000 = Adjusted Financial Need $10,000 This formula establishes the student’s eligibility for financial assistance, by which the total amount of aid received by the student cannot exceed the total financial need (or adjusted financial need). The student’s financial need must be re-calculated each year the student is in college.
  • WHAT IS THE EXPECTED FAMILY CONTRIBUTION? The Expected Family Contribution (EFC) is computed using family financial data submitted on the Free Application for Federal Student Aid (FAFSA) or the financial aid Profile (PROFILE) APPLICATION. This analysis estimates how much the family can be expected to contribute toward college costs, but makes no assumption about how they will finance that expense.
  • The EFC formula combines the “Student’s Contribution” and the “Parents’ Contribution” to arrive at the “Expected Family Contribution”. The following is a simplified version of this complex formula:
  • Student’s Contribution Student’s income, minus taxes &amp; a deduction of $3,080 for 2008-09, is assessed at a flat 50% rate Student’s assets are assessed at a flat 20% rate Parents’ Contribution Parents’ income, minus taxes &amp; standard deduction, is assessed at a graduated rate of 47% Parents’ assets, minus taxes &amp; asset protection allowance, are assessed at 5.6%
  • CUSTODIAL ACCOUNTS Custodial accounts (UGMAs and UTMAs) are the simplest long-term methods of funding future college costs. Any income generated by the assets in custodial accounts is taxed to the grandchild. If the grandchild is under age 24, the investment income, over $1,800, is subject to the “kiddie tax” rules and will be taxed at the parents’ tax rate. A custodian takes title and holds the assets for the child’s benefit and must distribute the assets to the minor upon reaching the age of majority (age 18 to 21, as determined by state law).
  • The advantages of a custodial account are: (1) simplicity and low cost, (2) shifts income to the grandchild, and (3) reduces the grandparent’s estate.
  • The disadvantages of a custodial account are: (1) loss of control, (2) kiddie tax rules, (3) negative impact on financial aid (assets assessed at 20%).
  • An outright gift to the grandchild, just prior to entering college, is a simple short-term method of providing funds to for college. If the total annual gift is under $12,000 ($24,000 for joint gifts), it will not be subject to the gift tax. If the grandparent is concerned about gifting to a grandchild, he may consider making the gift to the parent and letting the parent dispense the funds for college.
  • The advantages of an outright gift are: (1) control is not lost until the gift is made, (2) shifts income to the grandchild, (3) reduces the grandparent’s estate, and (4) simple and low cost.
  • The disadvantages of an outright gift are: (1) negative impact on financial aid (assets assessed at 20%, cash gifts are considered income and assessed at 50%), (2) loss of control, and (3) the grandparent is paying income taxes on the income generated by the assets during pre-college years.
  • Gifts made directly to an educational institution (either elementary, high school, or college) for a grandchild’s tuition and fees will not reduce the grandparent’s annual $12,000 gift tax exclusion for that particular grandchild. The gifts must be made directly to the educational institution.
  • The advantages of gifts made directly to the college for tuition and fees are: (1) reduces the grandparent’s estate without affecting the annual $12,000 gift tax exclusion, (2) the income from the sale of the gift is shifted to the grandchild,(3) control of the asset is kept until the child enters college, and (4) the gift is not subject to the generation-skipping tax (GST).
  • The disadvantages of gifts made directly to the college for tuition and fees are: (1) loss of control, (2) the grandparent is paying income taxes on the income generated by the assets during pre-college years, and (3) negative impact on financial aid (the gift is considered a resource of the student and will reduce financial aid on a dollar-for-dollar basis).
  • One of the best methods of helping fund a grandchild’s college education is to employ the grandchild in the grandparent’s business. The child must be a legitimate employee of the grandparents or the grandparent’s business. By employing the grandchild, income and assets of the grandparents will be shifted to the grandchild. In addition, the grandchild will learn the value of work.
  • The advantages of employing the grandchild in the grandparent’s business are: (1) the earned income of the grandchild is not subject to the kiddie tax rules, (2) the grandchild can utilize his full standard deduction on his tax return, (3) the wages paid to the grandchild can be deducted by the grandparent’s business, and (4) the earned income makes the grandchild eligible for a regular IRA or Roth IRA.
  • The disadvantages of employing the grandchild in the grandparent’s business are: (1) negative affect on financial aid (any income over $3,750 will be assessed at 50%), and (2) payroll taxes will have to paid on the grandchild’s wages.
  • Loans to the grandchild (or parent) may be a useful short-term method of funding a grandchild’s college education. If a grandparent wants to provide a grandchild with more funds than the annual $12,000 gift tax exclusion, a loan could be made to the grandchild. The grandparent could then forgive the loan after college years.
  • The advantages of loaning money to a grandchild for college are: (1) control of the asset is not lost, (2) the loan proceeds do not affect financial aid, (3) the loan balance can be forgiven after college years, and (4) subject to certain limitations, the loan can be interest-free or below-market rates.
  • The disadvantages of loaning money to a grandchild for college are: (1) the loan will not reduce the grandparent’s estate, (2) the loan will generally not reduce the grandparent’s income tax liability.
  • Federal gift tax law permits certain gifts to a minor in trust to qualify for the annual $12,000 gift tax exclusion even though the minor’s right to use the gift is delayed until the minor reaches age 21. If the minor does not choose a full distribution of the assets in the trust at age 21, the trust may be continued for an additional period of time.
  • The advantages of using a minor’s trust to help fund a grandchild’s college education are: (1) the grandchild does not gain control of the trust assets until he is 21 years of age or older, (2) the grandparent’s estate is reduced, (3) income could be shifted from the grandparent to the grandchild (if the trust distributes the income to the grandchild).
  • The disadvantages of using a minor’s trust to help fund a grandchild’s college education are: (1) high trust taxes rates and, (2) loss of control.
  • In the cases where the amount of funds is sufficiently large as to make distributions to a grandchild at age 21 undesirable, a Crummey trust may be preferable to a minor’s trust or a custodial account. If a grandchild does not exercise his right to withdraw the trust assets at age 21 (Crummey power), the trust assets could be maintained by the trust well beyond age 21.
  • The advantages of using a Crummey trust to help fund a grandchild’s college education are: (1) assets can be shifted from the grandparent to the grandchild, (2) the grandparent’s estate is reduced, and (3) the grandchild may not gain control of the asset until beyond age 21.
  • The disadvantages of a Crummey trust to help fund a grandchild’s college education are: (1) the negative effect on financial aid (the trust assets are assessed at 20%), (2) the grandparent loses control of the asset, (3) the high trust tax rates, and (4) the grandchild may exercise his Crummey power and withdraw the assets at age 21.
  • In the event of death, a grandparent can provide funds for his grandchild’s college education through his will with a testamentary trust. The trust could be funded with either life insurance proceeds, or part or all of the grandparent’s probate assets.
  • The advantages of a testamentary trust to help fund a grandchild’s college education are: (1) the grandparent does not give up control of the assets until he dies, (2) the trust could be restricted to pay only the grandchild’s education and health expenses after the grandchild reaches age 18.
  • The disadvantages of a testamentary trust to help fund a grandchild’s college education are: (1) if more than one grandchild’s college education are to be paid by the trust, an older grandchild may pillage the trust fund at the expense of the younger grandchildren, (2) the assets will have a negative affect on financial aid (the assets will be assessed at 20%).
  • A grantor retained annuity trust (GRAT) is an irrevocable trust in which the grantor retains a right to receive fixed amounts payable at least annually for life or for a term of years (similar to a fixed annuity). At the end of the term of the life interest, the remaining trust corpus is distributed to the designated beneficiaries free of any additional gift tax, even if the property has appreciated while held in trust.
  • The advantages of using a GRAT to transfer property include: (1) a transfer of property to a family member at a relatively low transfer tax cost, since only the value of the remainder interest is a taxable gift, (2) a removal of future appreciation from the grantor’s estate. None of the transferred property will be included in the grantor’s gross estate, if the donor outlives the trust term and IRC §2036 or 2039 does not apply, (3) a guaranteed income stream to the grantor during the term of the trust. The trust may permit income in excess of the amount required to pay the annuity to be distributed to the grantor or it may be held for the remainderman at no additional gift tax cost, and (4) the asset that is eventually transferred to the beneficiary can be sold and will be taxed at the beneficiary’s capital gain rate.
  • The disadvantages of using a GRAT to transfer assets to a family member include: (1) its status as a grantor trust for income tax purposes, although in some situations it may be preferable because of the compressed tax rate structure that applies to trusts, and (2) as with any irrevocable trust, the assets are not available outright to either the grantor or the beneficiary during the trust term. Also, all or part of the date of death value of the trust corpus may be included in the grantor’s estate under IRC §2036 or 2039 if the grantor dies before the trust terminates.
  • A grandparent who has both a charitable intent and a desire to help fund part of a grandchild’s college education may want to establish a charitable remainder trust. The grandparent would transfer assets to the trust and name the grandchild the beneficiary of the income to be distributed during the term of the trust.
  • The advantages of using a charitable remainder trust to help fund a grandchild’s college education are: (1) the grandparent’s estate will be reduced, (2) the grandparent will receive a charitable donation tax deduction, (3) the grandparent will not have to pay income taxes upon the sale of the asset, (4) the grandchild, not the grandparent, will pay the income taxes on the income received from the trust, and (5) a low-yielding asset could be converted to a higher-yielding asset without incurring any income tax liability.
  • The disadvantages of using a charitable remainder trust to help fund a grandchild’s college education are: (1) the grandparent loses control of the asset, (2) the negative effect on financial aid (income received by the grandchild is assessed at 50%), (3) the parent’s inheritance is reduced (this could be made up with life insurance proceeds), and (4) a gift is created when the grandchild is named the beneficiary of the income distribution.
  • A Coverdell Education Savings Account (CESA) is a long-term investment whose earnings and withdrawals are tax-free, if used for qualified college expenses. The non-deductible contribution cannot exceed $2,000 per year per grandchild and cannot be made after the grandchild is 18 years of age.
  • The advantages of a Coverdell Education Savings Account as a method of funding a grandchild’s college education are: (1) withdrawals are tax-free, (2) earnings grow tax-free, (3) people other than the grandchild and his parents can contribute to the account and (4) the grandparent’s estate is reduced.
  • The disadvantages of using a Coverdell Education Savings Account as a method of funding a grandchild’s college education are: (1) contributions are limited to $2,000 per year per grandchild, (2) the potential negative effect on financial aid (Coverdell Education Savings Accounts are assessed at 5.6% and distributions may be assessed at 50%), (3) any withdrawal from a Coverdell Education Savings Account may reduce the student or his parents eligibility for the Hope or Lifetime Learning tax credits, (4) withdrawals will reduce the student’s or parents’ eligibility for the student loan interest deduction, (5) the grandparent will lose control of the asset, and (6) the CESA must be used for qualified education expenses or rolled over to another beneficiary before the grandchild reaches age 30.
  • A QTP is a tax-free trust account that can be used to pay for college tuition, fees, room and board, books, supplies, and equipment. These can be used as a medium or long-term method of funding a grandchild’s college education.
  • The advantages of using a QTP as a method of funding a grandchild’s college education are: (1) the earnings grow tax-free, (2) the gifts to these funds can be spread over 5 years, (3) the grandparent’s estate is reduced, (4) because the grandparent can switch beneficiaries, some control of the assets can be maintained, (5) there is no income limit on the grandparent to make a contribution to a QTP, (6) income is shifted to the grandchild, and (7) withdrawals will not reduce the student’s or parents’ eligibility for the student loan interest deduction.
  • The disadvantages of using a QTP as a method of funding a grandchild’s college education are: (1) if the grandparent elects to spread the gift over 5 years and dies within the 5 year period, the balance of the gift will be included in his estate, (2) contributions must be made in cash, not appreciated property, (3) the potential negative effect on financial aid, and (4) distributions may reduce eligibility for the Hope and Lifetime Learning credits.
  • A Roth IRA may be used as a long-term method of funding a grandchild’s college education. The original contributions may be withdrawn tax and penalty-free to pay for qualified college expenses. Alternatively, a grandparent could gift the money to the grandchild (grandchild must have earned income) to fund his own Roth IRA.
  • The advantages of using a Roth IRA to fund a grandchild’s college education are: (1) the earnings grow tax-free, (2) withdrawals of the original contribution used to pay qualified college expenses are tax and penalty-free, (3) the grandparent maintains control of the asset.
  • The disadvantages of using a Roth IRA to fund a grandchild’s college education are: (1) there is an income limit on the person making a contribution, (2) a grandparent’s estate is not reduced, (3) no income is shifted to the grandchild, and (4) a conversion to a Roth IRA from a regular IRA could cause a tax liability to the grandparent.
  • A life insurance policy on the life of a parent can provide a long-term method of funding college costs. A life insurance policy could be funded by a grandparent on the life of a parent.
  • The advantages of life insurance as a method of funding a grandchild’s college education are: (1) they have no effect on financial aid, (2) the earnings grow tax-deferred, (3) availability of loans for college, (4) if a parent(s) dies, the grandchild will have funds for college, (5) if the parent(s) becomes disabled, the grandchild will have funds for college, (6) it provides a systematic savings plan for college, and (7) it is not included in the grandparent’s estate.
  • The disadvantages of life insurance as a method of funding a grandchild’s college education are: (1) high sales and administrative costs, (2) conversion of low-taxed capital gains into higher-taxed ordinary income, and (3) surrender charges and tax penalties for early withdrawal.
  • Annuities can be used as a long-term method of funding a grandchild’s college education. A grandparent can purchase an annuity and name a grandchild as the beneficiary.
  • The advantages of using annuities as a method of funding a grandchild’s college education are: (1) they have no effect on financial aid, (2) the earnings grow tax-deferred, (3) the income is shifted to the grandchild, (4) the grandparent’s estate is reduced, (5) variable annuities may keep up with the high college cost inflation rate, and (6) the rate of return and maturity value are known when the grandparent invests in a fixed annuity.
  • The disadvantages of using annuities as a method of funding a grandchild’s college education are: (1) high sales and administrative costs, (2) some annuities lack loan features, (3) conversion of low-taxed capital gains into higher-taxed ordinary income, and (4) surrender charges and tax penalty for early withdrawal.
  • Each family’s personal and financial circumstances are unique, there are many possible financial options to consider. However, you should consult a financial advisor who understands the financial aid system, as well as income tax laws and asset management, before implementing any of these financial options. Combining understanding of how the financial aid system works with the dynamics of tax and asset management planning is the most worthwhile approach to reducing the high cost of college. As with all types of financial planning, the sooner you implement the financial plan, the better your results will be. Start your grandchild’s college funding plan today!
  • Grandparents College Planning Ideas

    1. 1. “ The Best Kept Secret In America” Grandparents College Funding Ideas
    2. 2. College Funding <ul><li>Your guide to understanding the college financial aid rules and how to fund your grandchild’s education costs. </li></ul>
    3. 3. College is EXPENSIVE! Average Public University Average Private College Elite Private College $16,000 $32,000 $48,000
    4. 4. College is Expensive <ul><li>Public U. - $137,940 in pre-tax dollars </li></ul><ul><li>Parents are notorious non-savers </li></ul><ul><li>Only 4% have saved over $5,000 </li></ul>
    5. 5. Parents’ Complex Problems <ul><li>Desire to provide a good education </li></ul><ul><li>versus </li></ul><ul><li>Wiping out savings and retirement </li></ul><ul><li>or </li></ul><ul><li>Putting debt on the home or business </li></ul>
    6. 6. Example of Income & Asset Shifting SHIFTING INCOME AND ASSETS TO A GRANDCHILD Grandparents' tax: Stock value $30,000 Stock basis -20,000 Taxable gain $10,000 Grandparents' tax rate x 15% grandparents' tax $ 1,500 Grandchild's tax: Stock value $30,000 Stock basis -20,000 Taxable gain $10,000 Grandchild's tax rate x 0% grandchild's tax $ 0 FAMILY TAX SAVINGS $ 1,500 The preceding example shows a tax savings of $1,500. However, the loss in financial aid could exceed $10,000 per year.
    7. 7. <ul><li>What is Financial Aid </li></ul><ul><li>Federal, state, and college funds </li></ul><ul><li>Types of Financial Aid </li></ul><ul><li>Grants & Scholarships </li></ul><ul><li>Educational loans </li></ul><ul><li>Work-study programs </li></ul>
    8. 8. Concept of Financial Need Based on a &quot;needs analysis&quot; formula Example Total College Costs $ 20,000 - Expected Family Contribution - 8,000 = Financial Need $ 12,000 - Student’s Resources - 2,000 = Adjusted Financial Need $ 10,000
    9. 9. What is “Expected Family Contribution” (EFC)? <ul><li>How much the family can contribute </li></ul><ul><li>Based the “FAFSA” or “PROFILE” </li></ul><ul><li>Makes no assumption of how to pay </li></ul>
    10. 10. Expected Family Contribution <ul><li>Student’s Contribution </li></ul><ul><li>PLUS </li></ul><ul><li>Parents’ Contribution </li></ul><ul><li>EQUALS </li></ul><ul><li>Expected Family Contribution </li></ul>
    11. 11. Expected Family Contribution Student’s Income x 50% = Income Contribution Student’s Assets x 20% = Asset Contribution Parents’ Income x 47% = Income Contribution Parents’ Assets x 5.6%= Asset Contribution _________________ = Expected Family Contribution (EFC)
    12. 12. Custodial Accounts <ul><li>Simplest long-term method </li></ul><ul><li>Income is taxed to the grandchild </li></ul><ul><li>Subject to the “kiddie tax” </li></ul><ul><li>Distribution upon the age of majority </li></ul>
    13. 13. Advantages of Custodial Accounts <ul><li>Simplicity and low-cost </li></ul><ul><li>A reduction of grandparent’s income </li></ul><ul><li>A reduction of the grandparent’s estate </li></ul>
    14. 14. Disadvantages of Custodial Accounts <ul><li>Loss of control </li></ul><ul><li>“Kiddie tax” rules </li></ul><ul><li>Loss or reduction of future financial aid </li></ul>
    15. 15. Outright Gifts <ul><li>Simple short-term method of funding </li></ul><ul><li>If under $13,000, not subject to gift tax </li></ul><ul><li>Consider gifting to a parent and letting the parent dispense the funds </li></ul>
    16. 16. Advantages of Outright Gifts <ul><li>No loss of control until gift is made </li></ul><ul><li>Reduction in income tax </li></ul><ul><li>Reduction in estate tax </li></ul><ul><li>Simplicity and low cost </li></ul>
    17. 17. Disadvantages of Outright Gifts <ul><li>Negative impact on financial aid </li></ul><ul><li>Loss of control </li></ul><ul><li>No tax benefit during pre-college years </li></ul>
    18. 18. Gifts for College Tuition <ul><li>Made directly to an education institution </li></ul><ul><li>For elementary, high school, or college </li></ul><ul><li>No reduction of $13,000 gift exclusion </li></ul>
    19. 19. Advantages of Gifts for College Tuition <ul><li>Reduces estate without affecting annual $13,000 gift tax exclusion </li></ul><ul><li>Shifts income to the grandchild </li></ul><ul><li>Keep control of asset until college-age </li></ul><ul><li>Gift is not subject to the generation-skipping tax (GST) </li></ul>
    20. 20. Disadvantages of Gifts for College Tuition <ul><li>Loss of control </li></ul><ul><li>Increased income in pre-college years </li></ul><ul><li>Negative impact on financial aid </li></ul>
    21. 21. Employing the Grandchild <ul><li>One of the best methods of funding </li></ul><ul><li>Must be a legitimate employee </li></ul><ul><li>Income and assets will be shifted </li></ul><ul><li>Grandchild will learn the value of work </li></ul>
    22. 22. Advantages of Employing the Grandchild <ul><li>Income not subject to kiddie tax rules </li></ul><ul><li>Full standard deduction for grandchild </li></ul><ul><li>Wages paid can be deducted by business </li></ul><ul><li>Eligible for a regular IRA or Roth IRA </li></ul>
    23. 23. Disadvantages of Employing the Grandchild <ul><li>Negative impact on financial aid </li></ul><ul><li>Payroll taxes are incurred </li></ul>
    24. 24. Loans to a Grandchild <ul><li>Short-term method of funding </li></ul><ul><li>Give more than the annual $13,000 gift tax exclusion </li></ul><ul><li>Loans can be forgiven after college years </li></ul>
    25. 25. Advantages of Loans to a Grandchild <ul><li>Keep control of the asset </li></ul><ul><li>No effect on financial aid </li></ul><ul><li>Loan can be forgiven after college </li></ul><ul><li>Charge interest-free or below-market interest rates </li></ul>
    26. 26. Disadvantages of Loans to a Grandchild <ul><li>No reduction of estate taxes </li></ul><ul><li>No significant income tax reduction </li></ul>
    27. 27. Minor’s Trust <ul><li>Qualifies for $13,000 gift tax exclusion </li></ul><ul><li>Use of gift is delayed until age 21 </li></ul><ul><li>Continued for an additional time period </li></ul>
    28. 28. Advantages of a Minor’s Trust <ul><li>No loss of control until age 21 or older </li></ul><ul><li>Reduction in estate taxes </li></ul><ul><li>Possible reduction in income taxes </li></ul>
    29. 29. Disadvantages of a Minor’s Trust <ul><li>High trust tax rates </li></ul><ul><li>Loss of control </li></ul>
    30. 30. Crummey Trust <ul><li>Use if distribution at age 21 is undesirable </li></ul><ul><li>May be preferable to a Minor’s Trust or a Custodial Account </li></ul><ul><li>Control maintained beyond age 21 </li></ul>
    31. 31. Advantages of a Crummey Trust <ul><li>Assets can be shifted to the grandchild </li></ul><ul><li>Reduction in estate taxes </li></ul><ul><li>Control of asset until beyond age 21 </li></ul>
    32. 32. Disadvantages of a Crummey Trust <ul><li>Negative impact on financial aid </li></ul><ul><li>Loss of control </li></ul><ul><li>High trust tax rates </li></ul><ul><li>Grandchild may withdraw assets at 21 </li></ul>
    33. 33. Testamentary Trust <ul><li>Can provide funds through a will </li></ul><ul><li>Funded with insurance or probate assets </li></ul>
    34. 34. Advantages of a Testamentary Trust <ul><li>No loss of control until death </li></ul><ul><li>Can be restricted to pay only education and health expenses after age 18 </li></ul>
    35. 35. Disadvantages of a Testamentary Trust <ul><li>An older grandchild may pillage the trust fund </li></ul><ul><li>Negative impact on financial aid </li></ul>
    36. 36. Grantor Retained Trust <ul><li>Irrevocable trust for a certain term </li></ul><ul><li>Grantor retains a right to receive the income </li></ul><ul><li>Upon termination, the trust assets are distributed to the beneficiary </li></ul>
    37. 37. Advantages of a Grantor Retained Trust <ul><li>Only the value of the remainder interest is a taxable gift </li></ul><ul><li>Removes future appreciation from the grantor’s estate </li></ul><ul><li>Income stream to the grantor </li></ul><ul><li>Gain taxed at child’s capital gain rate </li></ul>
    38. 38. Disadvantages of a Grantor Retained Trust <ul><li>The income is taxed to the grantor </li></ul><ul><li>Assets not available to grantor or beneficiary during the trust term </li></ul><ul><li>Loss of control of the asset </li></ul>
    39. 39. Charitable Remainder Trust <ul><li>Charitable intent and a desire to help </li></ul><ul><li>Transfer assets to the trust </li></ul><ul><li>Name the grandchild the beneficiary of the income distributed </li></ul><ul><li>Upon termination the asset is distributed to the charity </li></ul>
    40. 40. Advantages of a Charitable Remainder Trust <ul><li>Reduction in estate taxes </li></ul><ul><li>Charitable donation tax deduction </li></ul><ul><li>No income tax upon the sale of the asset </li></ul><ul><li>Grandchild pays taxes on income received </li></ul><ul><li>Low-yielding asset can be converted to a higher-yielding asset without incurring an income tax liability </li></ul>
    41. 41. Disadvantages of a Charitable Remainder Trust <ul><li>Loss of control </li></ul><ul><li>Negative impact on financial aid </li></ul><ul><li>Parent’s inheritance is reduced </li></ul><ul><li>A gift is created when the income stream goes to the grandchild </li></ul>
    42. 42. Coverdell Education Savings Account (CESA) <ul><li>Long-term investment </li></ul><ul><li>Earnings and withdrawals are tax-free </li></ul><ul><li>$2,000 non-deductible contribution </li></ul><ul><li>No contribution after 18 years of age </li></ul>
    43. 43. Advantages of a Coverdell Education Savings Account <ul><li>Withdrawals are tax-free </li></ul><ul><li>Earnings grow tax-free </li></ul><ul><li>Other people can contribute </li></ul><ul><li>Reduction in estate taxes </li></ul>
    44. 44. Disadvantages of a Coverdell Education Savings Account <ul><li>Contributions limited to $2,000 per year </li></ul><ul><li>Potential negative impact on financial aid </li></ul><ul><li>May reduce eligibility for Hope or Lifetime credits </li></ul><ul><li>Withdrawals reduce eligibility for student loan interest deduction </li></ul><ul><li>Loss of control </li></ul><ul><li>Must be used for education expenses or rolled over before the grandchild reaches age 30 </li></ul>
    45. 45. Qualified Tuition Program (QTP) <ul><li>Tax-free trust account </li></ul><ul><li>College tuition, fees, room & board, books, supplies, and equipment </li></ul><ul><li>Medium or long-term funding </li></ul>
    46. 46. Advantages of a QTP <ul><li>Earnings grow tax-free </li></ul><ul><li>Gifts can be spread over 5 years </li></ul><ul><li>Reduction of estate </li></ul><ul><li>No income limits to contributions </li></ul><ul><li>Income is shifted to the grandchild </li></ul><ul><li>Will not reduce eligibility for student loan interest deductions </li></ul>
    47. 47. Disadvantages of a QTP <ul><li>If the grandparent dies within the 5-year period, the gift balance is put in the estate </li></ul><ul><li>Contributions must be made in cash </li></ul><ul><li>Potential negative impact on financial aid </li></ul><ul><li>Distributions may reduce eligibility for Hope and Lifetime Learning credits </li></ul>
    48. 48. Roth IRA <ul><li>Long-term method of funding </li></ul><ul><li>Original contributions may be withdrawn tax and penalty-free </li></ul><ul><li>Can gift money to fund a Roth IRA </li></ul>
    49. 49. Advantages of a Roth IRA <ul><li>Earnings grow tax-free </li></ul><ul><li>Withdrawal of original contributions for college expenses are tax & penalty-free </li></ul><ul><li>Maintain control of asset </li></ul>
    50. 50. Disadvantages of a Roth IRA <ul><li>Income limit on contributions </li></ul><ul><li>No reduction in estate taxes </li></ul><ul><li>No reduction in income taxes </li></ul><ul><li>Conversion from regular IRA may cause a tax liability </li></ul>
    51. 51. Life Insurance <ul><li>Long-term method of funding </li></ul><ul><li>Can be funded on the life of a parent </li></ul>
    52. 52. Advantages of Life Insurance <ul><li>No effect on financial aid </li></ul><ul><li>Earnings grow tax-deferred </li></ul><ul><li>Availability of loans for college </li></ul><ul><li>Upon a parent’s death, college is funded </li></ul><ul><li>Upon a parent’s disability, college is funded </li></ul><ul><li>Provides systematic savings plan for college </li></ul><ul><li>Not included in the grandparent’s estate </li></ul>
    53. 53. Disadvantages of Life Insurance <ul><li>High sales and administrative costs </li></ul><ul><li>Conversion of low-taxed capital gains into higher-taxed ordinary income </li></ul><ul><li>Surrender charges and tax penalties for early withdrawal </li></ul>
    54. 54. Annuities <ul><li>Long-term method of funding </li></ul><ul><li>A grandchild can be the beneficiary </li></ul><ul><li>Maturity date amount known </li></ul>
    55. 55. Advantages of an Annuities <ul><li>No effect on financial aid </li></ul><ul><li>Earnings grow tax-deferred </li></ul><ul><li>Reduction in income taxes </li></ul><ul><li>Reduction in estate taxes </li></ul><ul><li>Variable annuities may keep up with high college cost inflation rate </li></ul><ul><li>Rate of return and maturity value are known at time of investment in a fixed annuity </li></ul>
    56. 56. Disadvantages of Annuities <ul><li>High sales and administrative costs </li></ul><ul><li>May lack loan features </li></ul><ul><li>Conversion of low-taxed capital gains into higher-taxed ordinary income </li></ul><ul><li>Surrender charges and tax penalty for early withdrawal </li></ul>
    57. 57. Action Plan <ul><li>Consider the financial options </li></ul><ul><li>Consult a competent advisor </li></ul><ul><li>Combine the financial aid system with the tax and asset management planning </li></ul><ul><li>Start the college planning today! </li></ul>

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