From The Wall Street Journal Online (April 30, 2011) “Paying Grandkids’ College Bill”
"Recent tax-law changes are making it easier for families to help pay education bills for multiple grandchildren and even future generations. But grandparents have to make some tough decisions first."
If you are a grandparent wanting to help your grandchildren with the future costs of college tuition, pay attention now. Recent tax law changes are making it easier for you to help pay education bills for your grandchildren – and even future generations. As the Wall Street Journal recently explained, generous exemption increases in the federal gift and generation-skipping taxes are in effect now through 2012. Most experts believe this federal generosity may be short-lived, so now may be an excellent time to plan.
Tuition rates are rising steadily, and helping your grandchildren (or great grandchildren) obtain a good education without the burden of hefty loans is an excellent way to give them a “leg up” in the world. Finding a tax-savvy way of doing it is even better – especially for you!
Directly paying tuition is the simplest technique, and the most efficient. A grandparent is allowed to pay an unlimited amount of their grandchild’s tuition directly to the school without incurring the gift tax or eating away at their gift tax exemption and, if you’re looking at a school like Harvard, this also could be a potent estate reduction technique. Some schools also allow you to pay upfront for all four years, lock-in tuition rates, and avoid future increases (pre-paying tuition does not guarantee admission).
A less direct route comes in the form of 529 college-savings plans, by which you plug money into a trust especially designed for education. The advantage here is that the 529 plan can outlive you when you’re not around to pay directly, and for that reason can serve as the better model if you are funding a toddler’s future education. This grants greater leverage but there are, of course, wrinkles to explore in terms of tax liability and ownership.
The WSJ article is a good starting point, but you are well-advised to seek competent counsel before giving away any assets or establishing any type of irrevocable planning.