I have a 529 setup for each of the boys at Schwab. Grandpa would like to contribute to these accounts. His preferred method is to make a check out to each of he kids. Then I’m to cash or deposit those checks to their personal accounts and write a check from there to the 529. Or I can have the kids “pay to the order of” in the endorsement and that way get the funds into the 529. Honestly it would be easier if he just called Schwab and transferred the funds directly. But I don’t want to look a gift horse in the mouth - as it were.
My question for any tax-wise/529 wise members here: Could we run into any tax problems or contribution problems using his preferred method? Questions:
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If the kids get a check from grandpa and it’s deposited to their checking en route to their 529 then it counts as income which is treated more harshly for financial aid.
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Would there be any advantage - tax or financial aid-wise of grandpa transferring direct to the kids’ 529s rather than sending a check etc?
Any insight appreciated.
If it is a large amount, will it exceed your yearly max?
If it is a large amount, would it be better to have Gramps open his own 529 accounts with them listed as beneficiary, and then not use that money until their jr/sr years of college? That’s really only a problem if they would get need based financial aid based on your income and assets, but wouldn’t get it if Gramps put a lot of money into the accounts.
^ This is the best advice. Gramps opens his own ones.
What “yearly max”. Are you talking about gifts?
@BelknapPoint could you please once again explain about the gift max folks can use?
He’s looking at 10k per kid - which I think is below the 14k maximum per donee.
@thumper1 I’m referring to exclusion from the federal gift tax.
https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
I also notice in this IRS document that “tuition expenses you pay for someone” are not subject to gift tax.
So perhaps even if he went wild and doubled the contribution we wouldn’t need to worry about that. So then I guess it’s just a matter of being able to demonstrate to the IRS that the funds went to the 529 for education. ?
The other issue still would be FAFSA. Would these gifts be considered their income and assessed at the larger 20%? Or just become part of the parent arranged 529 which I believe is eyed at 5%?
If grandpa sends a check to the school there is no cap (i.e. the gift tax limits to not apply). This is the educational loophole, NOT funding a 529 or putting the money into a UGMA account for a minor.
How old are your kids? Are they currently in college? Why can’t you deposit grandpa check directly into the 529? My parents gave my kids money for their 529 and I was able to deposit the check directly into the 529.
Does Schwab provide deposit slips for the 529? Our state fund sends those out occasionally with the idea that we could give them to family members. Then Grandpa would send the check to Schwab.
I’m checking with Schwab on that that detail - if I can just have the kids endorse to Schwab 529 “Pay to the order of…”.
I spoke to Schwab and they said the kids can just endorse the check as payable to their 529 and that would work at least to see the funds into the account. Dealing with someone who likes to do things old school. Getting him to open a 529 for the kids would be a challenge. He’s getting up there. I did tell him he could just call Schwab and they’d do the needful so long as he gave them the account numbers. I predict checks. Grateful to have anything. 
Correct; in order for gift tax not to be a factor, the payment needs to be made directly to the educational institution.
As long as the check is made payable to and goes through the hands of the student, I still think it needs to be reported on FAFSA as “untaxed income” (FAFSA line 45.j.). It would be best if Grandpa contributed directly to the 529, but believe me, I understand what you mean by “old school” and not looking a gift horse in the mouth.
Edited to add: if the checks are made payable to you (parent) and then endorsed over to the 529, that would not have a negative impact on financial aid.
Good article which includes confirmation of the method I’m trying to steer grandpop to - grandparent contribution directly to parent-owned 529:
http://www.wsj.com/articles/when-grandparents-and-529-plans-for-college-savings-clash-1408747176