Dick Kaplan on Back to School: The New Parameters of Funding a Grandchild’s College Education
Richard Kaplan (Illinois) has just published “Back to School: The New Parameters of Funding a Grandchild’s College Education”
Abstract: This article examines several differentmechanism for funding college expenses from the perspective of agrandparent. The mechanisms considered include direct gifts to thegrandchild or the educational institution, college savings bonds (bothstate and federal), prepaid tuition contracts, college savings planscreated under tax code section 529, and Coverdell Education SavingsAccounts.
Although these college funding mechanisms are not new,legislation enacted within the past two years has radically alteredmany of the rules of thumb that have applied in the past. Specifically,the Tax Increase Prevention and Reconciliation Act of 2005 (actuallyenacted in May 2006) and the Small Business and Work Opportunity TaxAct of 2007 that accompanied that year’s increase in the federalminimum wage have basically eliminated any tax advantage of custodialaccounts as college funding vehicles. On the other hand, the PensionProtection Act of 2006 has enhanced the tax appeal of 529 plans at thesame time that the Deficit Reduction Act of 2005 (actually enacted inFebruary 2006) improved the financial aid status of such plans.Finally, that Deficit Reduction Act also created significant hurdlesfor grandparents who anticipate accessing the Medicaid program to paytheir long-term care costs.
To determine the approach that bestserves all family members, this article begins by considering severalfactors that are relevant to the financing of a grandchild’s collegeexpenses. These factors include: (1) the grandparents’ and thegrandchildren’s income tax situation, (2) the grandparents’ possibleexposure to gift taxes, (3) the grandparents’ desire to ensure that thefunds they provide are actually used to pay for college costs, (4) theMedicaid implications for the grandparents, and (5) the impact on agrandchild’s eligibility for needs-based financial aid. The articlethen examines the various mechanisms that are available to fund agrandchild’s college costs and analyzes each mechanism in terms ofthese factors.