The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
Q. My mother wants to gift my two kids $50,000 each for college. I know there can be tax and financial aid consequences. Any advice on the best way to do this?
— Lucky
A. Your mother has several options.
The best way really depends on what is most important to your mom, said Mary Scrupski, the director of estate planning with Prestige Wealth Management Group in Flemington and Millburn, New Jersey.
Scrupski said if your mom just wants to help your children with their education, she could set up a 529 plan for each child and contribute $50,000 to each account.
529 plans are tax-deferred accounts that are earmarked for education, Scrupski said. Earnings are not subject to federal income tax and generally are not subject to state income tax when used for the qualified educational expenses of the designated beneficiary such as tuition, fees, and books, as well as room and board, she said.
“If your children are young, the account could grow free of income tax for many years before it is needed,” she said. “This is a very tax-efficient way to pay for education.”
But there are gift tax concerns in setting up the plan, Scrupski said.
In general, your mother can give each child $14,000 a year without using up any of her lifetime gift/estate tax exemption, she said, but there is a special rule for contributing to a 529 plan.
“If she contributes the $50,000 in the first year, it will be pro-rated over the following five years at $14,000 a year,” Scrupski said. “This limit has much less impact, however, than it used to because the federal estate and gift tax exemption amount is now $5.45 million.”
Scrupski said that payment of tuition directly to the educational institution is not a taxable gift at all, no matter how large the payment, so this is another option.
But the direct payment of tuition would most likely jeopardize any financial aid the child would be eligible for based on need, she said.
“If financial aid is a concern, then a 529 plan account might work so long as your mother is the custodian, and not a parent,” she said. “If the parent is the custodian, the plan will most likely be considered an asset of the parent and will have to be reported on the child’s financial aid application.”
Once payments were made, however, out of the account, then this would be considered income to the child and would impact his or her financial aid, Scrupski said.
“Planning for financial aid can be challenging because each school has its own rules,” Scrupski said. “Your mother might want to wait until the child is out of school completely and then possibly gift the child the funds to pay his or her student loans or make gifts for other purpose such as a down payment on a house or a wedding, instead of paying for school if the child is likely to receive financial aid.”
Your mom may want to work with her accountant or tax attorney before gifting anything, said Vicky Tomaro, an investment adviser representative with Tomaro Financial Group in Wall, New Jersey.
If your mom gives more than the annual gift exclusion amount — if it’s not part of the special 529 five-year giving rule — it could affect your mom’s estate long-term, Tomaro said.
Image: OJO_Images
April 11, 2023
Uncategorized
September 13, 2021
Uncategorized
August 4, 2021
Uncategorized