Non-Parent Owned 529 Plans

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Grandparents often find themselves looking for a way to help their children or grandchildren with education expenses. There are a few strategies grandparents may consider depending on their preferences. The following are a few strategies grandparents may consider to help with higher education expenses.

Grandparent-owned 529 plan. In this strategy the grandparent owns the 529 plan in their name and makes contributions to the plan. The benefit of this is that the grandparent can reduce their estate, take a potential state tax deduction (if their state allows), control the investments, take tax-free qualified distributions, and name/change the beneficiary. Furthermore, when the beneficiary files for financial aid (FAFSA), grandparent-owned 529 plans are not included in the assets of the parent or beneficiary in determining financial need.

However, there’s potential downside to this strategy when the beneficiary files the FAFSA form to determine eligibility for financial aid. FAFSA considers parent-owned 529 plans to be assets of the parent and while included in the determination for financial need, the inclusion percentage is a maximum of 5.64%.

While grandparent-owned 529 plan assets aren’t included in the FAFSA calculation, qualified distributions are – up to 50%. This means that a grandparent taking a distribution for a grandchild may inadvertently reduce the amount of financial aid of the grandchild.

For example, a grandparent taking a $25,000 qualified distribution may reduce the grandchild’s financial aid by as much as $12,500! This could be a moot point however, if there are no plans to apply for financial aid.

Contributing to a parent-owned 529 plan. Grandparents may contribute directly to the parent-owned 529 plan. Some state 529 plans even allow the grandparent (or other contributor) a state tax deduction as well. Grandparents choosing this strategy get the benefit of giving to their grandchildren without directly impacting the grandchild’s eligibility for financial aid.

Paying tuition directly to the college or university. Grandparents may also choose to pay for a grandchild’s tuition directly to the college or university without incurring any gift or estate tax consequences.

However, like a qualified distribution from a grandparent-owned 529 plan, paying tuition directly to the college or university may impact the FAFSA calculation when determining financial aid. This is because the direct paying of tuition is considered income of the student.

Again, this could be a moot point if there are no plans to apply for financial aid.