Seems like a number of our clients are new grandparents and naturally they're interested in taking steps to help pay for college down the road. So, what is the best way for a retiree, a grandparent, to help pay for their grandchild's college?
If you live in the State of Florida and the grandchild is under the age of 5, I'm a big fan of the Florida prepaid tuition plan. That's where you pay either a lump sum or make payments over time and in return the plan guarantees the tuition costs of any in-state college. If you purchase these plans when the child is very young, the cost is quite small and very affordable and risk-free.
And no, you don't lose your money if your grandchild decides not to go to college. You can get a refund, you can transfer the benefit to other family members, and you can even have tuition paid to out-of-state schools.
What about other options? Well, the first option is the easiest and my favorite. Keep your money in your own account and during your lifetime if your grandchild goes off to college, at that time you can decide how and to what extent you want to help them out.
What if you're not around to see your grandchildren go to college? What do you do then? Well, if you've got a good relationship with your children, their parents, and you can trust them to follow your wishes, again to keep things simple, one approach would be just to let your children know what your wishes are and trust that they would follow through on your wishes.
If that doesn't satisfy what you're trying to accomplish, you could always make provisions in your estate documents that a portion of your estate be held in trust or for benefit of your grandchildren, whether it's one or several grandchildren.
Another option might be to establish a uniform gift to minor account or sometimes known as a uniform transfer to minor account. The account uses your grandchild's social security number, but you or a parent is the custodian of the account, so you control the account, not the grandchild.
If you go this route, I would suggest accumulating no more than maybe $20,000 to $30,000 in the account because when your grandchild turns 18 or in some states 21, legally the money is theirs and they would be free to use it for any reason they saw fit, even taking an around-the-world trip or buying an orange Corvette, so that's a downside. The upside is it can be a teaching tool. You can share the monthly statement with your grandchild when they're old enough to understand, show them what the money is invested in, and maybe that will spark an interest in investing and a desire to learn about money and finances on their part.
Another option, which I'm not a big fan of, is 529 plans. A 529 plan works like an investment account. The earnings grow tax-deferred and if they're withdrawn for higher education purposes they come out tax-free. The drawback, however, is your investment choices are limited and those choices are determined by each state and, quite frankly, some states do better than others. In addition, we see the accounts quite often being confusing to monitor and oversee. So, a 529 account would be an account of last resort and, quite frankly, we only recommend them to our clients when they want to make gifts that exceed the annual gift tax exclusion amount.
Having a strategy in place that makes sense for your situation to help pay for a grandchild's college will move you one step closer to experiencing your version of an incredible retirement, doing what you want when you want.