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“ 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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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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