Grandparent-owned 529 plan - change ownership?

Paying for College
1

I posted about this situation earlier - http://talk.collegeconfidential.com/discussion/1985287/best-strategy-for-grandparent-owned-529-in-light-of-new-prior-prior-year-accounting/%22 but I’m still not fully clear about the best way to handle a 529 account generously established years ago by our children’s grandparents. They want to maneuver the money in the most advantageous way, including transferring ownership of the account if that’s desirable (they currently own it).

We have 5 children and our oldest will start college this fall. She is presently the sole beneficiary of the account but we ultimately would like to provide each child with roughly 1/5 of the accrued total, which is close to 100K. So… each child can count on 529 help of about 20K.

Because 2015 and 2016 were both very bad income years for our family, my daughter’s EFC was $0 for freshman year (base 2015) and should be $0 for sophomore year (base 2016). In fact, because our children also participate in a free lunch program, it appears the $0 EFC for those years is an “auto-zero”.

Consequently, she received a full Pell grant award and is also receiving GA Hope scholarship money. She also received a church based scholarship award. All that leaves us with just under 5K in qualified education expenses left to cover - which, happily, is about the amount per year she can expect from the 529 her grandparents own.

Assuming she keeps her grades up sufficient to maintain her GA Hope scholarship, a similar picture should emerge for her sophomore year.

So far, so good. But I’m still confused as we look ahead toward her junior and senior years.

Her junior year FAFSA will use 2017 as the basis year and it’s possible our family income situation will improve by year’s end. That’s not guaranteed and we might still end up with an auto-zero for base year 2017… but I’m working hard to change that. With that said, her situation has definitely changed, as she has gotten her first jobs in 2017. She won’t end up earning a tremendous amount - probably less than $4500 total - but it’s something. She also has another 3K or so in a childhood savings account.

I suspect she will earn more in 2018. Our 2018 family income can’t be predicted yet.

With those facts in mind, I’m trying to determine if it might be advantageous to change ownership of the 529 either to her or us instead of having her grandparents continue to own it and make distributions on her behalf (either to the school directly, or to her as reimbursement for QEEs she covers on her own - books primarily). I just can’t seem figure out the financial aid implications for here junior and senior years, and I would really like to handle this matter as effectively as possible.

I sure hope that’s clear, and I would GREATLY appreciate any advice… including approaches I might not be aware of.

Thanks very much for reading!

2

It sounds like she’s going to a FAFSA only school. If you have an auto zero or simplified assets situation, she won’t have to report any income or assets. I believe the amounts received from others (grandparent 529 $$) isn’t reported either.

I wouldn’t change the 529 just yet. It might make sense when you are making more or have more kids in college drawing from the accounts.

3

One thing to consider is that the full value will be considered a parent asset. It might be best to just keep it in the grandparents name, and have them make a big distribution after each kid fills out the last FAFSA they ever have to fill out. Then no assets are ever shown from the 529, and no income is either. Not sure, that’s just my quick thought.

4

You are correct twoinanddone - my daughter’s school uses FAFSA only. My concern is about her junior and senior years, which will use 2017 and 2018 as the FAFSA base years. I’d prefer NOT to receive an auto-zero EFC for those years because I’m hoping to increase our family income in 2017-18 and beyond. In case that happens, I’d like to better understand the financial aid implications for her junior and senior years if she receives 529 distributions this year (and next) from a grandparent-owned account versus one she or her parents own.

5

If she owns the account, it will be considered a parent’s asset and any amount over the allowance given to parents (based on age of oldest parent) will be counted at 5.6%. If the account is transferred to her, the entire amount will be considered a parent asset, even the amount you are considering for the other kids.

If the grandparents continue to contribute, and you do get above the $50k amount that is the simplified assets amount, I think one of the questions on the FAFSA is “amount others contributed” and that’s where you’d put the $5000 paid in the prior year. It does not reduce the EFC dollar for dollar but I’m not sure how much does change things. It would seem to be better to have to report the $5k used in one year rather than the entire $100k every year as a parent’s asset.

Check with the grandparents’ fund manager. Maybe it’s possible to transfer only $20k of the fund to your oldest, and not transfer the bulk until the younger kids need it.

6

Maybe it’s possible to transfer only $20k of the fund to your oldest, and not transfer the bulk until the younger kids need it.

If there is any transfer of ownership, something like you’ve suggested would definitely be the plan… whether transferred to her or us. Assuming it’s possible, of course.

In this case, the oldest parent will turn 53 later this year. Do you know where I could find the allowance you mentioned?

Thanks for your help!

7

Check out my spreadsheet, it could help you try out the different scenarios. Of the money being a child asset after transferred, or just getting the distribution of grandparents 529 plan every year.

I think it is better to get the distributions every year, since about 6K of the distribution does not seem to affect financial aid as long as the child is not earning.

http://talk.collegeconfidential.com/discussion/comment/19992257/#Comment_19992257

8

If your income will increase enough to no longer qualify for auto zero ($25,000), it might still be low enough for simplified needs test (<$50,000), then student income would be considered, but not assets.

But student income would have a protection amount of around $6,400 before any of it would be assessed towards FAFSA EFC.

You could run different scenarios with an EFC calculator like the Collegeboard one. With the higher income, and maybe another sibling in college by the time D is a junior or senior in college. Then the EFC will be lower again.

Anyway, if she should lose the Pell grant, she could pay the rest with her student loan.

It sounds like she has costs covered with scholarships and grants, except for about $5,000.

9

https://studentaid.ed.gov/sa/sites/default/files/2017-18-efc-formula.pdf

FAFSA EFC formula for 2017/18
pages 4-7 of pdf explain simplified needs and auto zero

On page 9 and 10 are the regular worksheets for dependent student.

I believe any support from grandparent owned 529 in 2017 would be reported in question 45j on the 2019/20 FAFSA and counted as untaxed income as part of student income.

https://fafsa.ed.gov/fotw1617/help/totalMoneyReceived.htm

On page 10 of EFC formula pdf: regular worksheetA, page 2:

page 19 of pdf has the Parent Asset Allowance table
age 53 married, it looks like is $22,900

10

A grandparent-owned 529 account that is transferred to either student or parent ownership would be reported on FAFSA as a parent asset.